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Slash and pray

Written By: - Date published: 10:05 am, December 4th, 2008 - 14 comments
Categories: economy - Tags:

The Reserve Bank has cut 1.5% off the official cash rate, bringing it down to 5%. The rate has now been cut 2.5% in just six weeks, an unprecendented slashing. Mortgage rates will drop as well, but perhaps not by as much because the banks (excluding Kiwibank) have to borrow most of their money from overseas for lending here and international credit is hard to come by.

The Reserve Bank should have been cutting rates much earlier as the economy started to slow due to the credit crunch and high oil prices. Instead, it pointlessly tried to fight the inflation coming from those oil price rises by strangling our economy with high interest rates. Now, at least we are finally getting cuts but they are so large that they amount to little short of panic from the Reserve Bank.

14 comments on “Slash and pray ”

  1. lprent 1

    Actually I’d have to disagree. For anyone who has lived through a high inflation period, we’d prefer the reserve bank to be cautious. It is easy to look in 20:20 rear vision, but those same high oil prices were what also kicked off my worst nightmares of the 70’s and 80’s.

  2. vto 2

    I said at the time of the last increase last year that there was no need to increase then. Why didn’t Bollard listen to me? But seriously, this highlights some flaws in the Act. Namely, that its scope should be widened beyond inflation concerns. And secondly, that increases or decreases necessarily have to follow from historic data and there appears to be no way to take action based on more immediate, and perhaps unverified anecdotal, data. Which is where the last increase went wrong.

    2c says that the last few weeks minor real estate lift will get a further wee boost over the next few months (lordy knows after that tho). So if you’re are a scavenging bargain-hunting vulture now is the time to strike. craw craw.

    But it really is slash and pray as the headline puts it because there are some very heavy weights being loaded onto the economy at the moment (commodity price collapses etc). Bollard is obviously sweating.

  3. ianmac 3

    Winston Peters was long calling for a revision of the Reserve Bank Function. I wonder what would have been different had a reform been done? Kiwibank being in  a better position must give Jim Anderton some satisfaction.

  4. NX 4

    but perhaps not by as much because the banks (excluding Kiwibank) have to borrow most of their money from overseas

    ^ are you sure about this?
    If KiwiBank isn’t borrow money from overseas like every other bank, then where are they getting their money from?

  5. Lanthanide 5

    NX – New Zealand savings in the forms of term deposits and general savings accounts, for the most part.

    vto – clearly Bollard is paying attention to other things than just the inflation rate. If he were only considering the inflation rate, which is still lingering on the high side, he wouldn’t have cut rates nearly this much.

    I definitely think the last raise by .25% was unecessary, and that there probably should have been a gap between the 2nd and 3rd raises instead.

    The graph is wrong, by the way. It has it going from 7.5 to 6.0 to 5.0, it was actually 7.5 to 6.5 to 5.0.

  6. The graph is the Herald’s. useless aren’t they?

  7. Phil 7

    NX/Lanthanide

    Yeah, anecdote certainly suggests that before the DGS, a lot of money was coming out of other banks and into Kiwi, who a perceived as being safe because they’re owned by the Govt.
    On the lending side, they theoretically can’t lend it out as fast – you have to balance that with their prudential requirements to hold certain levels of capital against their lending.

    —–

    The Reserve Bank should have been cutting rates much earlier as the economy started to slow due to the credit crunch and high oil prices
    This is an ignorant, and economically illiterate, argument that frustrates me for two reasons – especially when it comes from people I respect as being reasonably intelligent.

    Firstly, it seems to me the RB has been ‘looking through’ imported inflation pressures, that’s why we didn’t see OCR increases when inflation was nearing 5%. If you look through the monetary policy statements you can see that justification in detail.

    Secondly, oil prices were a high profile item unfairly targetted. In public perception they’re intricately tied to their concept of inflation – you can see across the globe that inflation expectations mirror petrol prices almost exactly. Those that don’t; show a lagged effect to the headline measure.

    But, what this ignores is the large non-tradeable (ie; domestic) inflation pressure that have been elevated for some time now – skills shortages pushing up prices in the services sector, construction and so on, as well as local and central government charges increasing.

  8. NX 8

    Lanthanide wrote:
    NX – New Zealand savings in the forms of term deposits and general savings accounts, for the most part.

    ^ so are you telling me that Kiwibank has more savings accounts than Westpac or BNZ et al.?

    Even if that were true, I very much doubt their savings would off set what the banks owes for mortgages etc.

    So in that regard Kiwibank would have to line up for international money just as much as any other bank – hence why their interest rate mirrors the other banks.

    I realise Kiwibank is in a good position in terms of asset security – i.e. being primarily NZ based.

    But to be honest, I know jack about banking.

  9. Rich 9

    If the RBNZ had cut rates earlier, it would just have kept the housing bubble inflating to even more excessive levels. The previous government could have used fiscal and credit control measures to stop house price inflation while allowing general interest rates to drop, but the electorate wouldn’t let them.

  10. Rich 10

    @NX:

    According to their last annual report, Kiwibank has about 5.5bln out in loans and advances and 5.7bln in deposits and other borrowings. That figure excludes “other financial institutions”.

  11. Phil 11

    NX

    I think you’re getting mixed up with the stock of all housing lending a bank has, and the flow of new housing lending a bank might do.

    Obviously, the big 5 bank brands (ANZ-National, BNZ, ASB, Westpac) have the vast majority of the stock of all outstanding housing loans – they’ve been in the business for longer than most people reading this blog have been alive.

    However, when you’re thinking about new loans going out the banks door, Kiwibank is in a far better position than the big banks because, anecdotaly, they have a lot of money flowing into them in the form of deposits.

  12. Nickc 12

    “The Reserve Bank should have been cutting rates much earlier as the economy started to slow due to the credit crunch and high oil prices.”

    Steve do us a favour and never write about economics again. Inflation has not fallen bellow 2.5% since 2004, too close to the target band for comfort and the strong housing market prevented previous cuts. The OCR has been rendered less effective by fixed mortgages, so keeping the OCR high for a significant amount of time was needed to dampen the market. Imagine how big the housing crash would have been if rates had been cut too early.

    The problem was that oil prices fell quite late in the piece. The OCR is able to reduce prices by keeping the dollar high, thus reducing import costs.

  13. Nickc 13

    Other factors keeping the OCR high were the tight labour market, expansionary fiscal policy in the 2008 budget and high payouts for dairy farmers.

    You simply cannot ignore these as although they all seem pretty much irrelevent now they were important factors at the time.

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