Low inflation, low interest rates


The CPI rose only .3% in the June quarter and the annual increase was only 1%.

That is very good news for households:

Hon BILL ENGLISH (Minister of Finance): Statistics New Zealand today reported that inflation rose 0.3 percent in the June quarter, annual inflation fell to 1 percent, its lowest level since 1999, and the CPI is increasing at its slowest rate in more than 12 years. At the same time floating mortgage rates, at around 5.75 percent, are at their lowest level in 45 years. This is saving a family with a $200,000 mortgage about $200 a week compared with what they were paying 4 years ago. These factors are helping New Zealand families save more, pay down debt, and get ahead.

. . . Hon Dr Nick Smith: What other factors are helping New Zealanders get ahead?

Hon BILL ENGLISH: Although inflation has been falling, the economy has continued growing moderately. This is reflected in real after-tax wages, which have increased by about 11 percent since September 2008. The components of this are that gross wages have increased 12 percent, after-tax gross wages have increased 20 percent, and inflation has been a bit over 8 percent, which leaves the 11 percent increase. This is a vast improvement on the situation in the 9 years to September 2008, when New Zealand’s real after-tax wages increased by only 4.4 percent in total.

Hon Dr Nick Smith: How does the current level of inflation, at a 13-year low, compare with what the Government inherited when it came into office in 2008?

Hon BILL ENGLISH: When the Government came into office in November 2008, annual inflation was running at 5.1 percent, rather than 1 percent, as it is today. That is because power prices had risen by 72 percent in 8 years, petrol prices were around 10 percent higher than they are now, and floating mortgage rates were at decade highs of almost 11 percent. The lower inflation we are now experiencing, combined with steady increases in after-tax wages, mean most Kiwi families are better off now than they were in 2008, and that is why they are able to reduce their debt and increase their savings.

In the late 1980s we were paying more than 25% for seasonal finance. That sounds like a wonderful incentive for savers but raging inflation took too much of the value from savings.

Low inflation and low interest rates are a much better combination for businesses and for savers.




Tea Party Protest


That cup of tea which David Lange infamously stopped for 20 odd years ago came at the wrong time for New Zealand’s economy.

But fortunately many of the structural changes necessary for economic stability had been made and in spite of the last government’s anitpathy to the “failed” policies of the 80s most have largely been left untouched.

But the recession brings a new threat and if the government isn’t prepared to cut its coats to fit the cloth available today we’ll be creating debt which will dog the country and stunt its growth for many tomorrows.

 It’s tea party day in the USA, when communities across the country will be protesting against excessive government spending.

It’s an opportunity for us to let  our government know that it must curb its spending too because if it doesn’t  future growth will be strangled by too much debt.

Unlike the 1980s this might be the right time to pause for a cuppa.

Hat Tip: Fairfacts Media. 

Bollard taking us back to the 50s


My parents got some sort of government loan to build their house in the mid 1950s. I’m not sure if it was becasue Dad was a returned serviceman or if these loans were available for anyone, but I do know the interest rate was fixed at 3%.

I don’t think rates have been that low since then but Reserve Bank governor Alan Bollard has nearly taken us back to those times by reducing the official cash rate from 5% to 3.5%.

His rationale is continuing global uncertainty and confidence that inflation will be “comfortably within the 1 – 3 percent target band in the medium term.”

Interest is one of the bigger costs for farmers, not just for the mortgage but for working capital, especially those in areas like sheep and beef or crops where they get paid in big lumps a few times a year in comparison to dairying where you get a monthly cheque.

The change in the OCR won’t have an immediate impact on existing loans but it should give confidence that we’ll be paying less interest next time loans are negotiated.

It also reinforces tha major difference between what’s happening now and the ag-sag of the 1980s when interest rates and inflation were higher than 20%.

Who’s to blame?


The ugly picture painted by Treasury’s latest figures  can’t all be blamed on the turmoil in world financial markets.

Treasury has painted a very ugly economic picture for the incoming National government with cash deficits increasing, growth shrinking, tax revenue diminishing and unemployment rising.

Surely some of the blame for this can be laid on the failed policies of the noughties, if only because if labour was in power they’d be sure to blame it on the “failed” policies of the 80s and 90s.

Failed policies of the noughties


Labour blamed almost everything that went against them in the last nine years on the “failed” polices of the 80s and 90s and the previous National led government.

Will the new government be able to get away with blaming the failed polices of the noughties and the three Labour led governments since 1999?

No Problem With Inflation?


In the wake of what might be a decision by Labour  to loosen the reins on inflation it is instructive to look at the Telegraph’s  report on what’s happening in Zimbabwe.

The highest value banknote is worth Z$50 billion – which is presently enough to buy one can of baked beans. At the TM supermarket in Harare’s northern suburb of Borrowdale, many shelves were bare yesterday. But a kilogramme of mince cost Z$490 billion and a kilogramme of sausage was going for Z$170 billion. A litre of imported orange juice cost an eye-watering Z$303 billion.

Some prices have trebled from a week ago, when toilet paper worked out at just under Z$22 million for a single sheet. There was none in the supermarket yesterday, but by now there is probably an alternative use for the Z$50 million note.

It is only 20 years ago that New Zealand had inflation above 20% . I remember only too well the individuals and businesses which were casulaties of it; and the difficulties associated with bringing it down again.

No-one is suggesting we would be in danger of ending up like Zimbabwe if inflation was allowed to increase a bit, but the only winners from even a small increase will be speculators. 

Hat tip: Tumeke!

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