What a shame that the Reserve Bank has backed down on new the prudential liquidity rules that require the banks to raise a higher percentage of their money from longer term deposits. The rules were to come in at the start of next year, but the banks complained and in this country business always get its way so the rules won’t fully come in until 2012.
The rules were designed to help protect banks from another credit crunch (which, by the way, German experts are already predicting for next year) but a side-effect is forcing banks to raise more money domestically, rather than borrowing it from overseas, which would increase savings rates here and push up mortgage rates. These are both good things – we need to save more and borrow less, and we need to stop putting so much ‘investment’ into housing.
The really clever thing about increasing interest rates this way is that it wouldn’t have fuelled the ‘carry trade’ where people in countries with low interest rates borrow money to invest it in countries, like New Zealand, with comparatively high rates – this currency flow pushes up the currency hurting exporters. If anything, that would lower the interest rates the banks are willing to pay to borrow from overseas and they would have been borrowing less – all of which adds up to a (marginally) lower currency and a lower current account deficit.
We can’t keep borrowing ever more money from overseas to buy houses from each other. Forcing banks to borrow less from overseas and raise more domestically is an important step in that. It will help deflate the housing bubble, increase savings, lower the exchange rates, increase exports, and improve the current account deficit. What a pity the Reserve Bank lacks the courage to act when it’s desperately needed.