The small increase in the Official Cash rate, from the record low of 2.5% to 2.75%, has provided the Opposition with the opportunity to run round like chicken little.
Paul Goldsmith: How does the new 2.75 percent official cash rate compare with previous cash rate settings, and what steps is the Government taking to ensure that interest rate increases are not as severe as they were in the mid-2000s?
Hon STEVEN JOYCE: As I said, the official cash rate has been at a record low of 2.5 percent since March 2011. As the Reserve Bank Governor has indicated many times, it could not remain at this expansionary level for ever, particularly as the economy picks up strong momentum. The new official cash rate of 2.75 percent is significantly below its record high of 8.25 percent, which it was through much of 2008. The Government continues to support lower interest rates with its responsible fiscal policy and by addressing supply issues in the housing market. This has been good news for families who faced mortgage interest rates of nearly 11 percent back in 2008. A family with a $200,000 floating rate mortgage has been saving about $200 a week compared with 5 or 6 years ago. If the official cash rate increases by 1 percent over the coming year, this would be worth around $38 a week on that mortgage.
Anyone with a floating rate on a mortgage of $200,000 has been saving about $200 a week compared with what they’d have had to be paying before Labour lost the 2008 election.
If the rate goes up by 1% in the coming year they’ll be paying another $38.
No increase will be welcomed, but it is better than run-away inflation which the increase in the OCR is designed to forestall.
Paul Goldsmith: What reports has he seen on alternative approaches to economic and monetary policy, and how would these impact on interest rates for New Zealand households?
Mr SPEAKER: The Hon Steven Joyce, in as far as he has ministerial responsibility.
Hon STEVEN JOYCE: I have seen an alternative policy reported, claiming that apparently you can go soft on inflation by tinkering with the Reserve Bank of New Zealand Act and that somehow this will keep interest rates lower for longer. The trouble with those sorts of approaches is that the prescription does not stand up to scrutiny, particularly if you accompany it with much higher Government spending. History has shown that under Governments that go soft on inflation, the people who are hardest hit are those on low and fixed incomes, because their spending power does not keep up with the cost of living. Yet the very politicians who complain about the cost of living can now apparently approach a policy that would set them soft on inflation. That just does not make any policy sense. If you want to look after the vulnerable in society, control inflation.
Inflation is theft by incompetent economic management.
It erodes wealth, be it what you earn or what you save.
It reduces real buying power and the people it hits hardest are those who have least to begin with and are least able to cope with less.