Time to let interest rates fall

Written By: - Date published: 1:59 pm, May 16th, 2008 - 23 comments
Categories: economy - Tags: , , ,

The economy is clearly slowing. Fundamentally, it remains strong with high employment, good wages rises, and strong prices for our exports but employment and retail spending both declined in the first quarter of this year, the housing market is flat, and there is a danger that if the Reserve Bank keeps its foot on our economy’s throat much longer it will pass out into a shallow recession.

The markets are already expecting the official interest rate to start dropping; banks are dropping their fixed-term mortgage rates and price of the New Zealand dollar is falling (it’s an under-acknowledged fact that the point of moving up interest rates is mostly to move up the currency, so as to cool the economy to bring down inflation by choking exports and flooding local production with cheap imports). Lower interest rates will allow the economy to spring back into growth by reviving commercial borrowing for investment and letting the dollar drop further, so we get a better price for our exports and aren’t undercut at home by imports.

Reserve Bank Governor Alan Bollard is right to worry that this would entail more inflationary pressure (a lower dollar means oil imports are more expensive and we get more money into the economy for the same amount of export production plus employment and spending would recover) but it’s time to realise that most of the inflationary pressure New Zealand is facing is beyond his control. Oil and food are international commodities; their prices are going up everywhere and there is nothing that the Reserve Bank in little old New Zealand can do about it. There’s no point choking our economy over international inflation; it makes us poorer and does not get rid of the inflation.

So, Mr Bollard, it’s time to bring that rate down. Accept that international conditions mean inflation is going to remain robust and that is no reason to prevent New Zealand from growing.

23 comments on “Time to let interest rates fall”

  1. mike 1

    If Cullen delivers meaningful tax cuts they could be seen as inflationary by Bollard and he could rates high.
    Would have been much better to slowly phase them in as National proposed than doing nothing for 8 years then having to start cutting at the worst time.

  2. andy 2

    the only thing lower interest rates are going to ‘grow’ in this economic climate is yours and my fuel and grocery bill. It will certainly be deflationary on my bank balance..

    So tell me again why we need the Reserve Bank, if banks raise and lower interest rates independently of the RB?

  3. Steve: while reducing the OCR and increasing inflation might serve the poorly polling Labour governments agenda of reducing anxiety among the electorate during election year I think it would be a mistake to choose short term opportunism over longer term gains: I’m sure many retired people on fixed incomes don’t want to see their investments whittled away by inflation. They will have experienced rampany inflation in the 1980’s and will not look kindly on it happening again.

    The exchange rate is already starting to drop inspite of the OCR and the RBNZ is already having difficulty staying within their target inflation band: http://www.interest.co.nz/ratesblog/index.php/2008/04/24/chart-cpi-inflation-2/

  4. RedLogix 4

    An essential pre-requisite for the RB Governor role should be several years working in industrial plants tuning control loops. After they get good at the simple linear ones with no deadtime…they should then be forced to manually tune complex ones with strong cross-coupling to multiple variables, non-linear gains, and variable dead times.

    This experience should give them some actual feel for what they are doing when they get put in charge of our economy.

  5. IrishBill 5

    The monetarist’s mechanical understanding of the link between inflation and interest rates always amuses me. It’s about as cutting edge as the steam engine. I recommend Paul Ormerod’s book “The Death of Economics” to anyone that is interested in a readable thesis on the application of complexity theory in economics.

  6. Australia’s inflation is running at 4.3% and we’re always told we should be emulating them.

    Interest rates are dropping slightly because they rose out of line with the OCR at the height of the credit crunch, which is now easing, and there is an expectation that the OCR will soon fall.

    We do need to sort out the perverse incentives for people to put all their money in houses before we return to really low interest rates, but that’s a subject for another post.

  7. andy 7

    OT

    IrishBill:

    Have you read “the black swan: the impact of the highly improbable”, Nassim Nicholas Taleb.

    The RB has about as much predictive power as you or I! NZ is stuck between a rock and a hard place, either way we are screwed in the short term.

    Captcha: arresting idealists..??

  8. “The Reserve Bank of New Zealand Act 1989 specifies that the primary function of the Reserve Bank shall be to deliver “stability in the general level of prices.” Section 9 of the Act then says that the Minister of Finance and the Governor of the Reserve Bank shall together have a separate agreement setting out specific targets for achieving and maintaining price stability. This is known as the Policy Targets Agreement (PTA).

    A new PTA must be negotiated every time a Governor is appointed or re-appointed, but it does not have to be renegotiated when a new Minister of Finance is appointed. The Act requires that the PTA sets out specific price stability targets and that the agreement, or any changes to it, must be made public. The PTA can only be changed by agreement between the Governor and the Minister of Finance (section 9(4)). Thus, neither side can impose unilateral changes.

    Note, however, that under the Reserve Bank Act the Government has the power (section 12) to override the PTA. It can do this by directing the Reserve Bank to use monetary policy for a different economic objective altogether for a 12 month period, though again it must make the instruction public. A new PTA must then be negotiated to cover the override period and another PTA must be negotiated when the override ends. In either case, if a new PTA cannot be negotiated, the Governor can be dismissed. So far, this override section has not been used.”

    http://www.rbnz.govt.nz/monpol/pta/3027620.html

    My reading of this is that the Labour Government could force the RBNZ Governor to change his economic objective but only by sacking him. Surely this would be electoral suicide.

  9. RedLogix 9

    We do need to sort out the perverse incentives for people to put all their money in houses before we return to really low interest rates

    Well yes. But what better alternative is on offer? I’ve been around long enough to see far too many stock market investments fail totally… think Feltex. The thing with property is that while you may make less than you hope for, or go backwards for a short period… in the long run very few property investments totally fail. (Unless of course you’ve been sucked into a pyramid scam like Blue Chip.)

    When a bank lends you money (ie invests in YOU) they get a mortgage or some form of security that greatly reduces the risk that they may loose their capital…but the shareholder gets no such safety net. In the event of a business failure, the shareholder is always last in the queue for whatever funds can be recovered.

    While I have nothing against share investments, it should ALWAYS be done with money you can afford to loose. Which for most people is simply not the case. Most people only get one shot at saving a nest egg for their retirement and loosing it is not an option. For this reason alone, property will remain the the best attractive option for most ordinary folk.

  10. higherstandard 10

    RL

    ‘We do need to sort out the perverse incentives for people to put all their money in houses before we return to really low interest rates’

    Three words – Capital Gains Tax

  11. RedLogix 11

    HS…Not at all.

    Overseas markets with CGT’s have experienced the same explosive growth over the last property cycle as those without. This link details the huge range of diverse tax arrangements that exist in different countries:

    http://www.globalpropertyguide.com/guide-taxes

    Besides as the Australians know, CGT’s are very easy to avoid, by simply rearranging the nature of the investment. And in a falling market do you get a tax credit?

    If the CGT is applied to undrealised gains it hugely impacts on the cash flow with a whole range of perverse effects on all sorts of perfectly legitimate investors. We tried this for a while under Muldoon and it was a disaster. And if you make the CGT applicable to realised gains only, you simply create an even bigger incentive for investors to NEVER sell, thereby reducing market supply and driving prices up even further.

    Besides where do you draw the line? Do you apply a CGT to commercial or industrial property for instance? How do you distinguish between these types in the very common case of where the tenant both runs their business and lives on the same premises? CGT’s are VERY complex (read expensive) to administer, the current system has the great merit of treating residential property investment EXACTLY the same as most other business investment. The IRD studied this issue a few years ago and recommended doing nothing.

  12. AncientGeek 12

    Hey Bryan, you lost your mags’…..

    I’ll do a rational comment here on the weekend. Now it is time to partieee…

  13. ghostwhowalks 13

    How come Australia , with its Board of the Reserve bank and the US Federal Reserve and its Committee, the Bank of England and its Monetary Policy committee gets to make a decision we give sole responsibility to one person

  14. Hillary 14

    Redlogix: A family home is not the same as any other type of investment, high levels of home ownership contribute to family wellbeing and social stability. So if a CGT is not the way to protect home ownership, then some other way should be found.

  15. pixie66 15

    The high dollar has shielded us from the full impact of rising oil prices. Is there an estimate anywhere of what fuel prices are likely to be as the NZ $ falls?

  16. RedLogix 16

    Hillary,

    That is a very good question. The answer lies in the fact that homeowners are being ripped off by a range of forces that prey upon them. Consider:

    Over the life of a typical 25-30yr mortgage… the bank will make anywhere between 350 to 500% on the original capital. Bank lending practises have been the primary driver flooding money into the system and allowing prices to rise. Every dollar of the rises we have seen in the last few years was done on the back of borrowed money.

    The original developer of the subsdivision will pay directly for all the costs including all design, earthworks, services and roading. Even if the original land purchase cost was zero, the developer would still have to sell sections for at least $150k plus in order to make a profit. In the old days Councils provided these services out of the public purse as a way, but nowadays you get to pay rates for services you have already paid for.

    The cost of building in this country is more or less dictated by a tight circle of suppliers; Hardies, Fletchers and Carters. As a result building costs here are about double in real terms than over the ditch in Aussie. (Builders usually only make about 20-30k on a typical affordable size home build… not a lot really.)

    There are many elements to a solution.

    1. Housing NZ should be turning over 5-10% of its total stock every year and replacing them with new affordable homes that it builds. NZ has a LOT of rubbish housing stock that needs either upgrading or bulldozing. HNZ should be leading the way in this.

    2. All Residential LAND should be owned by the govt. Leasehold should be the norm. This would prevent banks from using land as security which is the main driver of price speculation.

    3. The Govt should be the lender of first resort for all first home buyers. The shared equity scheme currently being trialled in a limited form is fundamentally a good idea. Indeed, most residential mortgages should be with New Zealand owned banks. It is flat out dumb to be paying billions of dollars in interest to Australian banks.

    4. The interest paid by New Zealanders on their family home mortgages should be either tax deductable. This would eliminate most of the fiscal differential between home ownership and residential investment.

  17. Billy 18

    I found this terrifying:

    All Residential LAND should be owned by the govt.

    but happily so kooky that no-one will take it seriously.

  18. RedLogix 19

    Actually no. Hong Kong and Dubai are two countries that have long done something similar, and much the same effectively applies in Singapore. Besides there are actually quite a few areas of New Zealand where there are large tracts of leasehold land, the landlord being either Maori or Church interests. Leasehold land is a perfectly normal arrangement… nothing kooky about it at all.

    And what do you actually want to OWN the land for anyhow? I can accept that in the case of farming the land itself is the means of production, but for residential purposes the productivity of the land is not the purpose of the exercise, rather it is right to OCCUPY that is of interest to the occupier. This is exactly what a lease achieves.

    All I am proposing is that the Crown should be the titleholder of ALL residential land, and that perhaps Local Govt could administer the leases, charging rental instead of rates. The leases could allow owners exactly the same rights to build and improve as they have now, and permit the lease to be sold on the open market, exactly as it is now. But the crucial difference is that a bank would not be able to count the land value as part of the mortgage security… thereby immediately in one stroke eliminating a primary driver of both rising land values and inflation in one stroke.

    It’s actually a perfectly sound idea. But of course there are far too many vested interests making too much money off the present dysfunctioanl arrangements… so yes you are right Billy… it will never likely be implemented.

    captcha: made reserve reserve = crown land ???

  19. Draco TB 20

    Every dollar of the rises we have seen in the last few years was done on the back of borrowed money.

    You mean ‘printed money’ right?
    Fractional reserve banking means that when you go to the bank to borrow money the bank prints the money at that time. They’re effectively loaning you your money at interest.

    But of course there are far too many vested interests making too much money off the present dysfunctioanl arrangements

    Bingo. Capitalism itself is a have and has been for centuries.

  20. Phil 21

    “Fractional reserve banking means that when you go to the bank to borrow money the bank prints the money at that time. They’re effectively loaning you your money at interest.”

    Fractional reserve banking only exists in the fairy land of social credit nutballs, and is a gross confusion of banking terminology (which, I will conceed, is not that difficult to do…)

    You need to spend a bit of time understanding what “Capital Adequecy Ratio” means.

  21. Phil 22

    “The leases could allow owners exactly the same rights to build and improve as they have now, and permit the lease to be sold on the open market, exactly as it is now. But the crucial difference is that a bank would not be able to count the land value as part of the mortgage security thereby immediately in one stroke eliminating a primary driver of both rising land values and inflation in one stroke”

    Erm… no.

    Why would the bank treat the loan application ANY differently, if the tradable rights held by the prospective borrower haven’t changed one bit? The land itself is not the issue – it is the ownership of the right to onsell that makes the security.

    Oh, it’s alos worth pointing out that the trade of property between, say, you and I, is not included as part of inflation – it’s a net-zero transaction between households and othr sectors (which is what inflation actually measures). The associate costs of purchase lijke lawyers, real-estate agents etc ARE included, as are purchases of new property, and rental. But you selling a house to me, is not.

    What you’re suggesting is nothing more than window dressing and renaming. More crudely, you’re putting the pretty girl in a black dress instead of a red one – it doesn’t have any impact on whether or not you want to take her to the prom.

  22. Jum 23

    The Reserve bank will have a chance to show its political objectivity this year. I remember their verbal and physical disappointment when they discovered Labour had gained the treasury benches again in 2005.

    Lowering the interest rates by June/July will prove that objectivity. Lowering rates after the election, hoping Labour will be blamed for the rise in everything, pre-election, will be proof positive of the opposite. I think they’re doing a Bill Ralston on John Key’s instructions.

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    by Daphna Whitmore Every Sunday for the past two months unionists from First Union, with supporters from other unions, have set out to the Ihumatao land protest, put up gazebos and gas barbeques, and cooked food for a few hundred locals and supporters who have come from across the country. ...
    RedlineBy Daphna
    1 week ago
  • Climate Change: The wrong kind of trees?
    Newsroom today has an excellent, in-depth article on pine trees as carbon sinks. The TL;DR is that pine is really good at soaking up carbon, but people prefer far-less efficient native forests instead. Which is understandable, but there's two problems: firstly, we've pissed about so long on this problem that ...
    No Right TurnBy Idiot/Savant
    1 week ago
  • No freedom of speech in Turkey
    Canan Kaftancioglu is a Turkish politician and member of the opposition Republican People's Party (CHP). Like most modern politicians, she tweets, and uses the platform to criticise the Turkish government. She has criticised them over the death of a 14-year-old boy who was hit by a tear gas grenade during ...
    No Right TurnBy Idiot/Savant
    1 week ago
  • Speaker: Tadhg Stopford: Why I’m standing for the ADHB
    Hi there, just call me Tim.We face tough problems, and I’d like to help, because there are solutions.An Auckand District Health Board member has nominated me for as a candidate for the ADHB, because her MS-related pain and fatigue is reduced with hemp products from Rotorua.  Nothing else helped her. If I ...
    1 week ago
  • Good little vassals
    The Inspector-General of Intelligence and Security has published their report on whether the SIS and GCSB had any complicity in American torture. And its damning. The pull quote is this:The Inquiry found both agencies, but to a much greater degree, the NZSIS, received many intelligence reports obtained from detainees who, ...
    No Right TurnBy Idiot/Savant
    1 week ago
  • Who Shall We Turn To When God, And Uncle Sam, Cease To Defend New Zealand?
    Bewhiskered Cassandra? Professor Hugh White’s chilling suggestion, advanced to select collections of academic, military and diplomatic Kiwi experts over the course of the past week, is that the assumptions upon which Australia and New Zealand have built their foreign affairs and defence policies for practically their entire histories – are ...
    1 week ago
  • The Politics of Opposition
    For most of the time I was a British MP, my party was out of government – these were the Thatcher years, when it was hard for anyone else to get a look-in. As a front-bencher and shadow minister, I became familiar with the strategies required in a parliamentary democracy ...
    Bryan GouldBy Bryan Gould
    1 week ago
  • More expert comments on the Canadian fluoride-IQ paper
    The Green et al (2019) fluoride/IQ is certainly controversial – as would be expected from its subject (see If at first you don’t succeed . . . statistical manipulation might help and Politics of science – making a silk purse out of a sow’s ear). Anti-fluoride campaigners have been actively promoting it ...
    1 week ago
  • The return to guerrilla war in Colombia
    by Gearóid Ó Loingsigh On August 29th a video in which veteran FARC (Revolutionary Armed Forces of Colombia) commander Iván Márquez announced that they had taken up arms again was released. There was no delay in the reaction to it, from longtime Liberal Party figure and former president Uribe, for ...
    RedlineBy Admin
    1 week ago
  • Air New Zealand identifies this enormous plot of unused land as possible second airport site
    Air New Zealand couldn’t believe its luck that this seemingly ideal piece of real estate had so far gone entirely unnoticed. Air New Zealand’s search for a site to build a second Auckland Airport may have made a breakthrough this afternoon, after employees scanning Google satellite imagery spotted a huge, ...
    The CivilianBy admin
    2 weeks ago
  • Redline on the Labour Party
    No-one on the anti-capitalist left in this country today puts forward a case that Labour is on the side of the working class.  There are certainly people who call themselves ‘socialist’ who do, but they are essentially liberals with vested interests in Labourism – often for career reasons. Nevertheless, there ...
    RedlineBy Admin
    2 weeks ago
  • New Fisk
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Labour’s failure
    When National was in government and fucking over the poor for the benefit of the rich, foodbanks were a growth industry. And now Labour is in charge, nothing has changed: A huge demand for emergency food parcels means the Auckland City Mission is struggling to prepare for the impending arrival ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Ardern attempts to vaccinate Clarke Gayford live on television to prove that it’s safe
    Gayford, pictured here on The Project, before things got wildly out of control. A bold public relations move by the Government to encourage parents to vaccinate their children has gone horribly wrong. Prime Minister Jacinda Ardern appeared on tonight’s episode of Three’s The Project, where the plan was for her ...
    The CivilianBy admin
    2 weeks ago
  • Has Mr. Whippy gone too far by parking on our front lawns?
    Mr. Whippy’s business model has driven it down a dark road of intimidation. Residents in major centres around the country are becoming disgruntled by the increasingly aggressive actions of purported ice cream company Mr. Whippy, who have taken to parking on people’s front lawns and doorsteps in a desperate attempt ...
    The CivilianBy admin
    2 weeks ago
  • Cleaning up the water
    Today the government released its Action Plan for Healthy Waterways, aimed at cleaning up our lakes and rivers. Its actually quite good. There will be protection for wetlands, better standards for swimming spots, a requirement for continuous improvement, and better standards for wastewater and stormwater. But most importantly, there's a ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Fronting up
    Today I appeared before the Environment Committee to give an oral submission on the Zero Carbon Bill. Over 1,500 people have asked to appear in person, so they've divided into subcommittees and are off touring the country, giving people a five minute slot each. The other submitters were a mixed ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Politics of science – making a silk purse out of a sow’s ear
    Anti-fluoride activists have some wealthy backers – they are erecting billboards misrepresenting the Canadian study on many New Zealand cities – and local authorities are ordering their removal because of their scaremongering. Many New Zealanders ...
    2 weeks ago
  • Democracy – I Don’t Think So
    So, those who “know best” have again done their worst. While constantly claiming to be the guardians of democracy and the constitution, and respecters of the 2016 referendum result, diehard Remainers (who have never brought themselves to believe that their advice could have been rejected) have striven might and main ...
    Bryan GouldBy Bryan Gould
    2 weeks ago
  • Government says it will now build just one really nice home
    Following publication of this article, the Ministry has requested it to be noted that this supplied image is not necessarily representative of what the final house will look like, and it “probably won’t be that nice.” As part of today’s long-anticipated reset of the Government’s flagship KiwiBuild policy, Housing Minister ...
    The CivilianBy admin
    2 weeks ago
  • Imperialism and your cup of coffee
    Over the next week or two we will be running three synopses of parts of the opening chapter of John Smith’s Imperialism in the 21st Century (New York, Monthly Review Press, 2016).  The synopsis and commentary below is written by Phil Duncan. Marx began Capital not with a sweeping historical ...
    RedlineBy Admin
    2 weeks ago
  • Still juking the stats
    The State Services Commission and Ombudsman have released another batch of OIA statistics, covering the last six months. Request volumes are up, and the core public service is generally handling them within the legal timeframe, though this may be because they've learned to extend rather than just ignore things. And ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Hard News: Time for a New Deal: 25 years on
    In 1994, I was editing an ambitious street mag called Planet, from a fabled office at at 309 Karangahape Road. The thirteenth issue of the magazine was published in the winter of that year and its cover embodied a particularly ambitious goal: the end of cannabis prohibition.I wanted to do ...
    2 weeks ago
  • Not impressed
    KiwiBuild was one of the Ardern government's core policies. The government would end the housing crisis and make housing affordable again by building 100,000 new homes. Of course, it didn't work out like that: targets weren't met, the houses they did build were in the wrong place, and the whole ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • Solar beats coal
    As the climate crisis escalates, it is now obvious that we need to radically decarbonise our economy. The good news is that its looking easy and profitable for the energy sector. Wind is already cheaper than fossil fuels, and now solar is too:The levellised cost of solar PV has fallen ...
    No Right TurnBy Idiot/Savant
    2 weeks ago
  • A Step Too Far.
    A Crown Asset? For reasons relating to its own political convenience, the Crown pretends to believe that “No one owns the water.” To say otherwise would re-vivify the promises contained in the Treaty of Waitangi – most particularly those pertaining to the power of the chiefs and their proprietary rights ...
    2 weeks ago
  • Where Money Comes From
    Most people would say, no doubt, that they have a pretty good idea of what money is. They live with the reality of money every day. It is what is needed to buy the necessities of life and to maintain a decent standard of living. You get money, they would ...
    Bryan GouldBy Bryan Gould
    2 weeks ago
  • Banned by the Green Party leadership: Jill Abigail on women’s rights and trans rights
    The article below was an opinion piece that appeared in the Spring 2019 issue of Te Awa (the NZ Green Party’s newsletter) and on the Greens website.  In keeping with their policy of hostility to women defending women’s right to female-only spaces, Green bureaucrats have since removed the opinion piece.  ...
    RedlineBy Admin
    2 weeks ago
  • The fallacy of the proximity argument.
    Longer term readers may remember my complaining that, as a political scientist, it is burdensome to have non-political scientists wanting to engage me about politics. No layperson would think to approach an astrophysicist and lecture him/her on the finer details of quarks and black holes, but everybody with an opinion ...
    KiwipoliticoBy Pablo
    2 weeks ago
  • Where We Stood: Chris Trotter Replies To Stevan Eldred-Grigg.
    Joining The Fight: Stevan Eldred-Grigg's argument for New Zealand staying out of the Second World War fails not only on the hard-headed grounds of preserving the country’s strategic and economic interests; and not just on the soft-hearted grounds of duty and loyalty to the nation that had given New Zealand ...
    2 weeks ago

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