Debt hangover will linger


Reserve Bank governor Alan Bollard says New Zealand’s debt hangover will linger:

In a speech to the Employers and Manufacturers Association in Auckland, Dr Bollard said governments, firms, farmers and households across many parts of the advanced world took on large amounts of debt in the last couple of decades. He noted that rapid increases in indebtedness have often foreshadowed a difficult period for the economy.

Fortunately, New Zealand avoided the sort of costly systemic financial crisis that a growing number of other countries faced, and while government debt had increased substantially it remained low by international standards.

“But it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained,”Dr Bollard said.

The accumulation of debt owed by individual firms and households, and borrowers disappointed that incomes and asset prices have not gone on rising as they expected are “clearly playing some role in the low rates of growth New Zealand has seen in productivity and GDP,” Dr Bollard said.

New Zealand households are finally saving more than we’re spending, but not by much. The need to earn before we spend is acknowledged but the debt grew over years and it will take years for it to shrink.

Federated Farmers’ president Bruce Wills warns that some farmers have too much debt to survive a drought:

“We have a very highly indebted rural sector, no question, particularly our dairy sector,” Wills said in reaction to Reserve Bank figures which show agricultural debt has taken a sharp upturn in the first half of this year, sitting at the end of June at $48.3 billion. 

    The figures are particularly concerning because a new Farm Price Index developed by the Reserve Bank and the Real Estate Institute of NZ shows that farm prices have declined by 24.8 per cent from their peak in October 2008, while agricultural debt increased by 12.7 per cent over the same period (see chart). 

    A combination of high debt and falling land values could put pressure on farm balance sheets and is a particular concern because farm incomes have been falling due to lower commodity prices and the stubbornly high New Zealand dollar. . .

Wills said not all of the debt being taken on was bad, because some of it was being used to increase production by converting grazing land to dairying, which produced higher returns. But overall debt levels were too high. 

    “We now have higher rural debt levels than when the worldwide credit crunch hit in 2008, which is pretty concerning because we should have all got the message that we are carrying too much debt,” he said.

The last couple of seasons have been once-in-a-generation ones for almost all farming sectors. Only the very optimistic were expecting those high prices to continue and projected prices for the coming season could prove the pessimists right.

Dr Bollard’s speech is here.

Bollard retiring


Reserve Bank governor Alan Bollard won’t be seeking to renew his term when it ends in September.

The Chair of the Reserve Bank Board, Dr Arthur Grimes, said the Board will search in New Zealand and abroad to identify a successor to Dr Bollard.  The Governor is appointed by the Minister of Finance on the recommendation of the Board. 

The importation of people for key positions doesn’t usually generate the same angst as the importation of money to buy land.

Quake no excuse for over regulation – Bollard


New Zealand needs to avoid a costly regulatory over-reaction to the Christchurch earthquakes, Reserve Bank Governor Alan Bollard said.

But is he also warning us to expect an increase in the official cash rate?

It would be inappropriate, all things being equal, for monetary policy to be stimulatory during the reconstruction period . . .

Disaster preparedness was necessary and desirable, but not costless, he said.

Increases in safety standards, such as seismic strengthening, can result in significant costs for an economy that linger long after the risks they aim to address have occurred.  They can also create a complicated regulatory environment that may result in significant impediments for activity.

“The challenge here will be to avoid a costly regulatory over-reaction to a one-off event,” Bollard said. Consistent with the Policy Targets Agreement, monetary policy does not react to such short-term price changes.

The bank’s 50 basis point reduction in the official cash rate after the February earthquake was an insurance measure to avoid a significant and persistent deterioration in activity.

“We were conscious, however, that depending on wider economic conditions, this insurance would need to be removed as rebuilding, and a recovery in activity more generally, drew the economy’s resources into production.

That sounds like an intimation that the cash rate will be increased once the Christchurch rebuild kicks in.

He also said a substantial earthquake in Wellington might require Central bank intervention.

“A bad Wellington earthquake with an epicentre in the nation’s capital, could engender a more extreme financial market reaction, and it would be the Reserve Bank’s role to intervene to ensure an orderly foreign exchange market if that proved necessary.

“If the country’s political leadership and key administrative infrastructure were caught up in an earthquake, this could drive a bigger financial reaction, and make government policy responses much harder,” he said.

The full speech, Economic impacts of seismic risk: lessons for Wellington is here.

It includes lessons from Christchurch:

We have long known that this region is at risk from seismic events, and clearly we must prepare for potential disruptive events of any sort.  However, we must also consider what degree of preparedness is appropriate to ensure the survival of people, as well as organisational effectiveness.  Several factors are relevant in this regard.

  • Disaster preparedness is necessary and desirable, but not costless. Increases in safety standards (such as seismic strengthening) can result in significant costs for an economy that linger long after the risks they aim to address have occurred. They can also create a complicated regulatory environment that may result in significant impediments for activity.
  • A related consideration is the frequency of events. While it is possible to prepare for very low-frequency high-impact events, doing so may be constraining in terms of activity and prohibitive in terms of costs. The assessment of such risks in New Zealand is currently very complex and there is a lot of work currently going on to assess this.
  • We must also be conscious of New Zealand’s characteristics as a nation. In contrast to many other developed economies, we are geographically and economically isolated. If we face large challenges, we may do so with little external financial support.

He also said that institutions should focus on preparedness, competency, leadership, delegation and resilience rather than detailed plans for specific situations that may not repeat themselves.

It would be  a waste of time, energy and money to prepare for every event but general preparedness for any event is sensible.

OCR down to 2.5%


Reserve Bank Governor Alan Bollard has reduced the official cash rate by half a percentage point to 2.5%.

“The earthquake has caused substantial damage to property and buildings, and immense disruption to business activity. While it is difficult to know exactly how large or long-lasting these effects will be, it is clear that economic activity, most certainly in Christchurch but also nationwide, will be negatively impacted. Business and consumer confidence has almost certainly deteriorated.

“Even before the earthquake, GDP growth was much weaker than expected through the second half of 2010. Households have continued to be very cautious, with retail spending volumes and residential investment both declining. The export sector has benefited from very high commodity prices, however, farmers have focused on repaying debt rather than increasing spending. Also the early summer drought constrained farm output through this time. Signs that the economy was beginning to recover early in 2011 have been more than offset by the Christchurch earthquake.

“In putting together the forecasts underlying this Monetary Policy Statement, the Bank has had to make many important assumptions based on limited information. Over the coming weeks and months, these judgments will be tested as new information comes to hand. For now, GDP growth is projected to be quite weak through the first half of the year. This will gradually build up to a very large reconstruction programme by 2012 that will last for some years and contribute to a period of relatively strong activity.

“Future monetary policy adjustments will be guided by emerging economic data. We expect that the current monetary policy accommodation will need to be removed once the rebuilding phase materialises. This will take some time. For now we have acted pre-emptively in reducing the OCR to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe.”

No mention of inflation, the overriding concern is lack of growth.

Just as well commodity prices are high, that’s the one bright spot in the short term outlook.

Key tops Listener power list


It’s no surprise that Prime Minister John Key tops the Listener’s top 10 in its 2009 Power List.

The panel says he is:

being identified by leadership scholars as pioneering an entirely new style of political leadership in this country. Sceptics may cite his pragmatism as evidence of overt risk-aversion, but so far his reasonable, moderate demeanour and light-handed management has worked magic for the Government’s standing. He has been the polar opposite of Helen Clark, resisting both the micromanagement of others’ portfolios and playing favourites in the caucus. His cheerful tolerance of coalition partners’ ructions – “The bulk of people who come into politics have type-A personalities!” – has saved National from being embroiled in their crises.

Bill English is second followed by Alan Bollard, Rodney Hide, Steven Joyce and Rob Fyfe.

Then comes Michael Stiassny, the country’s senior receiver. The introduction to the list explains:

Perhaps the most telling detail about this year’s Power List . . .  is that a receiver (Micahel Stiassny) comes in at No 7. Yes, it has been a tough year; a year when debt became a dirty word, when old power bases were weakened by the recession. . .

Tariana Turia is ninth then John Whitehead and Peter Jackson. The top 10 has an 11th place – it’s filled by Phil Goff.

Then there’s those who have been delisted:

Craig Norgate who was 4th in the Business and economy section last year; Andrew West who was 3rd in agriculture  and Pat Snedden who was 4th in health and medicine.

The panel that selected the 2009 almanac of influence was chaired by Listener senior write Rebecca Macfie. Members were Lynn Freeman who hosts Radio NZ’s arts programme; Karl Du Fresne, Chris Wikaira, director of PR firm Busby Ramshaw Grice; Jane Clifton; Jacqueline Rowarth, Director of Agriculture at Massey; Bernard Hickey, Alan Isaac who chairs NZ Cricket, is a director of Wakefield Health, trsutee of NZ COmmunity Trust, chair of McGrathNicol & Co and advisor to Opus International; and Stephen Franks.

The full list and commentary won’t be online until Boxing Day. I subscribe to the magazine and if I didn’t I’d fork out the $3.90 for this issue.

OCR unchanged


The Official Cash Rate remains at 2.5%.

Federated Farmers and other exporters have been caliing on Reserve Bank governor Alan Bollard to cut the rate again in the hope it would put some downward pressure on the value of the dollar.

But if an OCR at 2.5% isn’t lowering the attraction to the New Zealand dollar another small reduction would be unlikely to have any effect.

Bernard Hickey gives his view on Bollard’s statement at

Confidence up, OCR down


The National Bank Business Confidence survey  showed an improvement in March, the largest in nine years.

But while a net 15% now expect a deterioration in business conditions, down from a net 39% in February, it’s still more a case of things not being so bad rather than being good.


There is a similar message from Reserve Bank Governor Alan Bollard:

“We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.

 His comments accompanied his announcement that the Official Cash Rate has been reduced by 50 basis points to 2.5%. I think that’s around the rate when my parents bought their first house in the mid 1950s.

But it’s not just another fall in the OCR that’s significnat, it’s Bollard’s statement that he expects the rate to be at this level or “modestly lower”  until the latter part of next year.

RB unhappy with long term interest rates


Daily updates from our bank have been showing a steady climb in long term interest rates.

That trend is concerning Reserve Bank governer Alan Bollard.

“In these circumstances we believe the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook.

“As indicated in our March Statement, we are projecting interest rates to remain at relatively low levels for an extended period.”

Dr Bollard said that if this apparent distortion persists, it could put unnecessary pressure on the cost of borrowing by firms and households.  calls it a jawboning statement and notes it resulted in a drop of more than a cent in the value of the $NZ.

Higher interest rates are enjoyed by people with money to invest, providing the real value isn’t being offset by inflation, but they are a significant cost for most businesses.

Dairy farmers get monthly payments which helps their cash flows but sheep, beef and cropping farmers usually get their income in chunks once or twice a year and need seasonal finance to tide them over between cheques.

OCR down to 3%


The Reserve Bank has reduced the Official Cash  rate by 50 basis points to 3%.

The OCR has gone down 525 baisis points in six months but Reserve Bank governor Alan Bollard has signalled he’s not expecting big cuts from now:

“As economic activity troughs, we expect the rapid easing of monetary policy to slow. Any future cuts will be much smaller than observed recently. We do not expect to see in New Zealand the near-zero policy rates of some countries. New Zealand needs to retain competitiveness in the international capital markets. We will assess the need for further cuts in the OCR against emerging developments in the global and domestic economies and the responses to policy changes already in place.”

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%.

ORC to stick to core business?


The Otago Regional Council is considering sticking to its core business.

Chair Stephen Carins said:

His intention was for staff to put together a policy paper to go to the council next year, looking at ways the council could “focus” its agenda on “core business” for the rest of this term.

” . . . It is time to stick to core business, partly because of the economic climate.”

He said the council has been working on this for a year and it’s not a response to Local Body Minister Rodney Hide’s call for councils to rein in rates.

It may not have anything to do with Reserve bank governor Alan Bollard’s call for local bodies to to play their part in reducing costs, either.

But it’s a welcome sign that councils are aware it’s not their money they’re spending, it’s ratepayers’ money and they have a responsibility to minimise the amount they take and spend.

That’s a two way street though. If we want local bodies to stick to their knitting then individuals and organisations who think the council should help with a pet project need also accept that if it’s not core business it’s not ratepayers’ responsibility and they’ll have to look elsewhere for funds.

UPDATE: Apropos of this – Adolf at No Minister  asks why environment Waikato has $51m in reserves and wonders what reserves other councils hold.

Recession’s over ?


When announcing last week’s drop in interest rates Reserve Bank governor Alan Bollard said the recession was technically over.

John Key doesn’t share his confidence.

Bernard Hickey is sure there’s worse to come.

Tui is too:


Negotiating from position of strength


Reserve Bank governor Alan Bollard is urging trading banks to pass on reduced interest rates to customers.

That could require negotiations with bank managers and it’s important to do that from a position of strength:


(The cartoon is from Jock’s Country Life by David Henshaw, published by Allen Calendars 2007.)

OCR down to 5%


The Reserve Bank has announced a drop of 1.5% in the official cash rate, taking it to 5%.

That bank’s media release said:

Reserve Bank Governor Alan Bollard commented that “ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role in shaping today’s decision. Activity in most of our trading partners is now expected to contract or grow only very slowly over the next few quarters.

“Economic activity in New Zealand will be further constrained as a result, compared with our view in October.

“Inflation is abating here and overseas as a consequence of these developments. We now have more confidence that annual inflation will return comfortably inside the target band of 1 to 3 percent some time in the first half of 2009 and remain there over the medium term. However, we still have concerns that domestically generated inflation (particularly local body rates and electricity prices) is remaining stubbornly high.

“Today’s decision brings the cumulative reduction in the OCR since July to 3.25 percent, and takes monetary policy to an expansionary position.

Given recent developments in the global economy, the balance of risks to activity and inflation are to the downside. Thus it is appropriate to deliver this reduction quickly to support the economy and keep inflation from falling below the target band.

“Monetary policy is working together with the depreciation of the New Zealand dollar and the fiscal stimulus now in train, to provide substantial support to demand over the period ahead and to create the conditions for some rebound in growth as global conditions improve.

“To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers. . .”

The silver lining to the comparatively high interest rates we’ve faced is that the bank has had more scope for cuts and it has certainly acted on that since July when the OCR was 8.25% as this Herald graphic  shows:

Graphic / Christoph Lukasser
Graphic / Christoph Lukasser

People on fixed mortgages won’t get an immediate benefit from this but businesses which have overdraft facilities and farms which need seasonal finance ought to get a reduction in their interest rates.

There is a flip side of course in that people who depend on savings and investments will face a drop in income.

Kathryn Ryan discussed the issues  on Nine to Noon.

Trust them to put politics before ethics


Labour’s decision to make political capital out of the financial crisis may be part and parcel of an election campaign.

But dragging the governor of the Reserve Bank governor Alan Bollard into their game is yet another example of the disdain Helen Clark, Michael Cullen and their colleagues show towards the convention of an apolitical public service.

Inquiring Mind says it’s politcally smart but ethically wrong.

The Hive thinks Alan Bollard should resign for not briefing National and sees the need for constiutional change.

Kiwiblog says Bollard’s decision not to consult other parties undermines confidence in the public service neutrality and then gets personal .

Roarprawn says Bollard has been compromised.

Keeping Stock is outraged.

No Minister says it’s more evidence Labour can’t be trusted.

The Herald reports on some reservation National and Bollard have about the deposit guarantee scheme.

And Garrick Tremain says:

OCR down 50 points


The Reserve Bank has reduced the Official Cash Rate by 50 basis points to 7.5%.

Bank Govneror Alan Bollard said the rate was decreased because the domestic economy is slowing, the global economy is deteriorating and a combination of increasing costs and decreasing demand is putting pressure on businesses.

“While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.

“The weakness in economic activity is expected to translate into lower inflation pressures in the medium term. Headline inflation is expected to peak around 5 percent in the current September quarter before trending down thereafter. However, food price inflation, exchange rate depreciation and higher wage costs will tend to keep headline inflation at elevated levels through 2009.

“With medium-term inflation pressures expected to ease, it is appropriate to move towards a less restrictive monetary policy stance. Compared to the June Monetary Policy Statement, we have brought forward some of the projected interest rate reduction, but have not altered the expected overall decline. We believe this response is warranted in light of the tightness of current credit conditions and the time it will take to affect the actual interest rates faced by households and businesses.”

The dollar dropped by half a US cent to 65.67 cents after the annoucnement.


A lot of commentators say that is good for exporters. But when I look at the big ticket items in farmers’ budgets I think any gain we get from higher returns will be cancelled out by the increase in costs for fuel, fertiliser and any other imported inputs.

Country Could Weather Economic Storm Better Than Cities


The ag-sag of the 1980s influenced my generation as the 1930s depression affected that of my parents. We determined never to be that vulnerable to the vagaries of political and economic cycles again and while many are starting to worry about the economic outlook farmers and rural communities are much better placed than we were 20 years ago.


The sudden loss of subsidies plus a high dollar, inflation and interest rates above 20 percent and low commodity prices had a devastating impact in the 80s. Land prices plummeted leaving many of us owing more than the value of what we owned. As we retrenched those who worked for or provided services to us, and processed our produce lost work and customers. Eventually the impact of the ag-sag spread from farms to rural communities and then to towns and cities, and the downturn was then aggravated by the 1987 share crash.


Now, interest rates and inflation are higher than desirable, but still well below the levels we faced 20 years ago and not all sectors are getting poor returns. Cropping farmers are enjoying a long awaited upturn and the dairy payout is at record levels. While sheep and beef incomes are dismal it is not like the 80s when farmers received bills for sending stock to the works because the transport and killing costs exceeded the price of the animals.


Higher land prices mean most still have good equity in their properties too although rising land values are not going to keep pace with many repeats of last season’s losses. However, while prices have a long way to go to make sheep and beef farming sustainable meat prices are improving and sheep and beef farmers can take heart from what is happening in other sectors.


While the rise in dairy and grain prices was anticipated, no-one picked the increase would be as fast and as great as it has been so there is hope for a similar resurgence in the meat industry. Beef prices are on record highs in the United States, it is only the high exchange rate which is diluting the returns to our farmers. The growing demand for protein throughout the world which is helping dairy farmers should transfer into meat prices soon. And the huge decrease in stock numbers in the wake of last year’s drought in Australia and drought and dairy conversions here means demand will outstrip supply and those farmers who have stuck with sheep and beef are well placed to take advantage of that.


The ag-sag hit North Otago particularly hard because it coincided with another of the recurring droughts which plagued the district. We’ve had only about 1/4 of our annual rainfall in the first half of the year, but the impact of dry weather will never be as bad as it was 20 years ago because a far greater area is irrigated now.


Reserve Bank Governor Alan Bollard is predicting tough  times ahead.


Dr Bollard said:

* Household spending – the main driver of economic growth in the 2000s – will contract over the next couple of years, despite the Government’s announced tax cuts.

* Economic growth will come to a virtual standstill this year and will grow well below par at 1.4 per cent in the March 2010 year.

* House prices are forecast to plunge from their peak last year, by 22 per cent when inflation was taken into account.

* Unemployment will almost double to 6 per cent over the next three years and job creation will go backward over the next four years.

In the 80s the recession was felt first and hardest on farms and in the provinces. This time because of the growing international demand for what we produce so well, the outlook for agriculture is brighter which means the provinces may be protected from the worst of what looks like an urban-led downturn.

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