Written By:
Steve Pierson - Date published:
10:52 am, July 24th, 2008 - 20 comments
Categories: economy -
Tags: interest rates
The Reserve Bank has dropped the Official Cash Rate from 8.25% to 8%. Inflation is well outside the Bank’s 1-3% target range but there appears to be a recognition that there’s no point strangling our economy with high interest rates when that can’t bring down international oil and food prices.
Don’t expect mortgage rates to instantly drop a quarter of a percent though. The banks had already priced in a 50% chance of a rate cut and the still unwinding credit crunch means banks have to pay a premium to get credit from abroad at present (and they can’t get enough domestically to meet demand). Not to mention that 80% of mortgages are on fixed interest terms.
These same factors worked against the Reserve Bank’s effort to slow the economy 2-3 years ago. International credit liquidity (there was lots of cheap credit back then) and fixed mortgages buffered the economy from the rising OCR and, now, they will dampen the stimulatory effect of a lower OCR.
Critics of the Reserve Bank argue it was too slow to raise interest rates and head off the housing bubble and that it has been too slow in easing now, pushing the economy into recession. Underlying all this there is a need for a serious examination of the timeliness of monetary policy and whether its myopic focus on inflation is right for New Zealand.
The current rise of populism challenges the way we think about people’s relationship to the economy.We seem to be entering an era of populism, in which leadership in a democracy is based on preferences of the population which do not seem entirely rational nor serving their longer interests. ...
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The site will be off line for some hours.
Either way, thank god Bollard looked past the numbers on inflation to the causes.
I don’t really agree that it’s fair to blame the reserve bank for the housing bubble. An earlier rates spike might have stopped people from being stupid sooner, but it wouldn’t have stopped them from being stupid. And in the process he’d have shafted exporters and everyone who didn’t believe in fairies.
“…and everyone who didn’t believe in fairies.”
I’m not quite sure how an attack on the greens relates to this, but here here.
T-rex, agreed.
A drop in rate was inevitable I think.
Let’s put some of the blame for the debt levels and housing prices where it lies – at the feet of the banks.
An un-reported side issue to the melt down in housing and 2nd tier banking system is the Reverse mortgages market. I notice those cute adverts of elderly people taking a barrow load of brick down to the car yard are no longer being shown on tele. As property prices fall a lot of elderly who tapped into their equity will find two things out – they will not be able to secure as much funds as they thought and the Reverse mortgage companies will own their houses much earlier than expected.
Aj,
The vast majority (it might even be all) of Reverse Equity providers in NZ belong to SHERPA (the Secure Home Equity Release Providers Associaton).
The reason they’re not advertising is because they can’t source the funds in the international market at a reasonable interest rate to then turn around and lend it to NZer’s. The price of property here is an extreemly minor and secondary concern.
Long story short; Reverse equity mortgages from SHERPA companies have enough inbuilt safeguards that no-one is ever going to lose their home. No-one is ever going to find that they have negative equity because their house price suddenly fell.
“Let’s put some of the blame for the debt levels and housing prices where it lies – at the feet of the banks.”
Rather than putting on your xenophobe hat and slagging off the Aussie banks (oh – and kiwibank too, they’ve had huge run-ups in borrowing) you would be better off looking toward the individuals who thought property prices never go down, and the real-estate agents who perpetuate the myth.
“you would be better off looking toward the individuals who thought property prices never go down, and the real-estate agents who perpetuate the myth.”
Absolutely. But I think criticism of the banks lending policies is also entirely justified. The mortgage terms they were providing both assumed and fueled unsustainable capital gains in housing.
Um, Phil, there was no mention of the Aussie banks just the banks in general.
Iceland has allready gone bust( eefectively- they were bailed out by some Nordic banks)
There interest rates were higher than ours
http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e060227
And yet their policy was the same as John Keys, spend up large by borrowing to ‘transform’ the economy.
Arent we glad Cullen built up those surpluses over the years and didnt fritter it away in tax cuts during the boom years when they would have added to inflation( and interest rates)
as a sideline
25.03.2008
Monetary policy statement by the Board of Governors of the Central Bank of Iceland:
The Central Bank of Iceland raises its policy rate
The Board of Governors of the Central Bank of Iceland has decided to raise the policy rate by 1.25 percentage points to 15%. The assumptions underlying the inflation forecast published in Monetary Bulletin in November 2007 entailing an unchanged policy rate until after the middle of this year have not held.
http://www.sedlabanki.is/?PageID=287&NewsID=1690
Could this be in store for NZ, after 18 months of a Key government
Phil @ 12:06 you only addressed one of my points…lending has dried up, the reason is because of the global credit crisis.
I never said anything about these borrowers – and that is what they are – having negative equity or losing their homes. The reverse mortages are structured so that doesn’t happen. But under a falling real estate market such arrangements become quite unattractive to both borrowers and lenders.
” The mortgage terms they were providing both assumed and fueled unsustainable capital gains in housing.”
I don’t consider that to be true. Lending terms and conditions have not really changed in the last few years, but the number of people walking through the door has declined dramatically of late. NZ did not have anywhere near the kind of take-up in Lo-doc and Ninja (no income, no job, no assets) loans as the US or elsewhere. Our banks were actually remarkably constrained in their lending relative to their overseas counterparts.
You only need to look back at some of the old market commentaries from guys like Tony Alexander or, shock horror, Cameron Bagrie, to see that they were very aware of the overextension of the housing market and consumer spending, and trying to bring it to the attention of the public.
“Arent we glad Cullen built up those surpluses over the years and didnt fritter it away in tax cuts during the boom years when they would have added to inflation( and interest rates)”
You have to be careful saying that. If taxes had been lower peoples spending and saving behaviour, along with economic growth, would have been different. As a result, it is possible that the current account deficit could have been significantly smaller in that other situation.
The underlying idea is as follows. Permanent budget surpluses are unsustainable, therefore the surplus is actually forced savings. If the government is forcing you to save money – then why do you need to save out of your remaining disposable income? (Its a version of Ricardian equivalence http://en.wikipedia.org/wiki/Ricardian_Equivalence)
We will know if this is the case if the current account deficit improves markedly over the next few years (given that surpluses will no longer be run).
Ninja loans are just stupid.
NZ banks have not been that bad, but they have still been pretty irresponsible in my opinion.
1) They happily provided zero equity loans.
2) They happily provided repayment:income ratios that were obvously going to cause financial hardship.
Some would argue that it’s up to the person taking the loan to ensure they’re capable of meeting its requirements. That is bullsh*t. It is up to the BANK to take defensible risks with the money people have entrusted to it. If that means refusing loans, that is totally reasonable.
And lending terms HAVE changed. Try getting a zero-equity mortgage now!
One of the great ironies of the current meltdown…
Banks are asking for their money back. But no other banks will step in and refinance. All are doing it.
They are effectively asking for their own money back (sounds silly but think about it). What do they think is going to happen? There aint no money around to pay it back!
Banks have a lot to answer for.
Remember that in the past it has taken govt intervention to control naughty bank behaviour. examples – taking ownership changed to taking a mortgage, no right to repay before term changed to the opposite.
etc. badly written post sorry but couldnt help it and now have to race out the door.
ghostwhowalks – stop taking the piss – the surpluses did get spent – unless you can point out where these untold billions are?
Take your blinders off dude.
Ants, have a look at our government debt now as compared to 9 years ago.
Then check out our super fund.
I think you’ll see where the money went, and accept the wisdom of it.
Ants if Cullen ‘spent’ the surplus how come we have the same huge amounts available each year.
—You have to be careful saying that. If taxes had been lower peoples spending and saving behaviour, along with economic growth, would have been different. As a result, it is possible that the current account deficit could have been significantly smaller in that other situation.—
Nonsense. The experience from the 1990s is that if you cut taxes people binge on consumer items – most of which are made overseas and which therefore would make the current account deficit worse.