OCR down .25 basis points

June 11, 2015

Reserve Bank Governor Graeme Wheeler has announced a small drop in the Official Cash Rate:

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.

Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased.

The New Zealand economy is growing at an annual rate around three percent, supported by low interest rates, high net migration and construction activity, and the decline in fuel prices. However, the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed.

Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued.

With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.

House prices in Auckland continue to increase rapidly, and increased supply is needed to address this. The proposed LVR measures and the Government’s tax initiatives planned for 1 October 2015 should ease the impact of investor activity.

A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range.

We expect further easing may be appropriate. This will depend on the emerging data.

It’s good to see policies to address the supply side of the Auckland housing problem being acknowledged so that the rest of us aren’t paying in higher interest rates.


Inflation targeting works

December 1, 2014

The Reserve Bank’s focus on inflation is working:

Inflation targeting has delivered price stability without reducing long-term growth, and remains the appropriate focus for monetary policy, Reserve Bank Governor Graeme Wheeler said today. . .

“Price stability has brought many benefits. It enables people to plan and contract with greater certainty for longer periods. It reduces the inflation risk premium in interest rates and the need for speculative inflation hedges, and it reduces the insidious toll that inflation exacts on the more vulnerable and less financially sophisticated,” Mr Wheeler said.

The opposition’s calls for a less rigorous approach to controlling inflation is foolish.

Inflation is theft, it erodes the real value of savings and that hits the poorest hardest.

“In the 20 years before the Act, annual real GDP growth averaged 2.2 percent while annual inflation was volatile around an average of 11.4 percent. Since 1990, real GDP growth and annual inflation have averaged 2.6 and 2.3 percent respectively, and there has been a marked decline in inflation variability.”

Mr Wheeler said the Reserve Bank is a ‘flexible inflation targeter’.

“We seek to anchor inflation expectations close to the price stability objective while retaining discretion to respond to inflation and output shocks in a flexible manner.”

This flexible, medium-term approach to policy was drawn on at the outset of the Global Financial Crisis when the Bank lowered the Official Cash Rate by almost 6 percentage points in 2008-2009, even though headline inflation was initially well above target. This policy stance was able to cushion the impact of the crisis.

In order to do its job effectively, Monetary Policy needs to be supported by prudent fiscal policy and sound structural adjustment policies. Monetary policy can affect the demand for housing and help ease imbalances in the housing market while supply is increased. But it cannot free up more land constrained by zoning regulations, address procedural and pricing issues around planning consents, offset tax policies in the housing sector, or raise productivity in the construction sector. . .

The tax and spend policies proffered by opposition parties before the election would have been inflationary and pushed up interest rates.

Housing prices reflect supply and demand. The best way to address that is to increase the supply where it’s not meeting demand. Local government has a big part of play in doing that by sensible zoning and simple and timely consent processes.

The full speech is here.


Prudence best recipe for sustainability

August 15, 2014

Trans Tasman previews next weeks PREFU:

. . . What the PREFU will highlight are Treasury forecasts on economic growth remaining robust, but “normalising” after the dairy boom last season, and on fiscal surpluses thinner than those set out in the budget.

There’s no windfall in revenue as there was in 2005 when the Govt of the day, caught by surprise, scrambled to splash out big spending programmes like Working for Families. The economic situation NZ finds itself in during this cycle is very different. Then credit growth was running at around 10%, compared with 4% now, inflation was high, and consumption was fuelled by rampant debt. This time round, the Reserve Bank Governor Graeme Wheeler jumped in early, and has got the surge in house prices under control. Inflation is subdued, wage growth is only moderate, productivity is rising, households are keeping their spending in check, and corporate balance sheets are in good shape. 

So the cycle this time will have a flatter, steadier profile, but growth will be at a sustainable pace, lasting longer. The economy is growing another “leg,” with hi-tech exports rising exponentially. For the Govt, the aim is to keep the economy running on a smooth, upward trajectory. Its eyes are on winning not just this election, but in 2017 as well. For this to be achieved, it has to deliver rising standards of living through the whole cycle. It can’t yet risk another boom-bust, of the kind which has dogged NZ over the last half century, if is to capitalise on the reputation it has sought to nurture of being the most prudent economic managers the country has had in the modern era. . .

The improving outlook for the country has been hard-won and is a result of careful management.

The expected outlook for growth at a sustainable pace and lasting longer is encouraging but it’s not assured.

We know what a National-led government has achieved and can be confident they will continue with the same prudent recipe to ensure that growth is sustainable

A prospect of a weak Labour Party leading a coalition propped up by the Green, New Zealand First and Internet Mana Parties gives no cause for confidence.

Policies announced so far are repeating the failed recipe of the past based on the toxic ingredients of  higher taxing, higher spending.


Low spending, lower interest rates

June 12, 2014

Quote of the day:

Reserve Bank Governor Graeme Wheeler can only show restraint on interest rate rises if New Zealanders show restraint of their own.

This is Rob Hoskings’ introduction to a column headlined: Want low interest rates? Keep lid on spending.

We all have a role to play in that through our own spending and saving and also what we expect of government.

National has made it quite clear it won’t be doing an election-year lolly scramble.

The return to surplus hasn’t been easy and it’s not going to blow the hard-won gains by profligacy.

Opposition parties try to give the impression they accept the wisdom of careful management of public funds. But their strong attacks on every single measure National has introduced to curb spending and their propensity for big-spending promises show they don’t really mean it.

They’re wringing their hands over the Reserve Bank’s small increase in interest rates from historic lows and today’s expected rise, while not resiling from the borrow and spend policies of the noughties which pushed interest rates into double figures and led New Zealand into recession before the rest of the world.

New Zealand has recovered well from the recession, but continued good economic health requires more of the prescription of increased savings and investment and restrained spending from all of us.


Dairy future bright but . . .

May 9, 2014

New Zealand’s dairy sector has a bright future, but important challenges need to be managed to ensure it retains its dynamism.

That’s the view of Reserve Bank governor Graeme Wheeler:

Mr Wheeler told the DairyNZ conference in Hamilton that the dairy sector makes a vital contribution to the New Zealand economy.

“Dairy exports make up almost a third of New Zealand’s annual merchandise exports, animal numbers and prices have increased and on and off farm productivity growth has been impressive.” . .

“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable. . .

“If the exchange rate remains strong, it is likely to be reflected in continued low or negative tradables inflation. In such circumstances, the high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the Official Cash Rate needs to be raised.” . . .

He’s saying that interest rates might not increase as far or as fast as predicted.

Mr Wheeler said that dairy debt almost trebled over the past decade, and currently stands at $32 billion.

“It is concentrated among a small proportion of highly leveraged farms with around half of the dairy debt being held by only 10 percent of dairy farmers”.

Despite the prosperous outlook for the dairy sector, Mr Wheeler warned that even the most dynamic enterprises can lose competitiveness and suffer losses in market share, so there are important challenges to manage.

“On the external front these include the oscillations in global dairy prices, increasing competition from other international suppliers, the risk of slower growth in China, and the need to continue diversifying our export markets, including positioning for the enormous longer term opportunities in the Indian market. On the domestic front, dairy farmers are conscious that high dairy prices can turn around quickly and will need to continue managing their cash flows and borrowings in a prudent manner.”

Another threat is political.

A LabourGreen government would add to costs through the imposition of new taxes, increased compliance and other anti-business, anti-farmer and anti-growth initiatives.


2014 going to be a cracker

December 15, 2013

Brian Gaynor thinks next year will be a cracker for the economy:

There are strong indications that it will be a once-in-a-generation year, as were 1951 and 1974 when the New Zealand economy grew by 15.6 per cent and 7.2 per cent respectively.

Economic growth is unlikely to be quite as strong as 1951 or 1974 but we now have some similar characteristics, particularly a soft commodities boom and a huge increase in the country’s terms of trade index, which made these standout years. . . .

New Zealand’s economic performance has been disappointing since the mid-1970s, particularly compared with Australia. There have been occasional bursts of heightened economic activity, mainly driven by increases in consumer debt caused by rising house prices, but there has been limited investment in the country’s productive sector.

The economy has been characterised by large net migration outflows as New Zealanders have been attracted by high-paying jobs across the Tasman.

But the economic momentum has swung dramatically over the past twelve months and transtasman migration flows could reverse as Australians are attracted by greater job opportunities in New Zealand, particularly in relation to the Christchurch rebuild. . . .

He lists several reasons the outlook is more like the boom years than those of the past 40 years:

Terms of trade: The country’s terms of trade index rose 7.5 per cent, to 1356, in September, the highest level since December 1973. Australia’s terms of trade have fallen 18 per cent this year.

Dairy: GlobalDairyTrade auction prices have appreciated 52 per cent over the past twelve months and dairy exports surged 49.1 per cent in the three months ended October 31 compared with the same three months in the previous year. Recent surveys show that farmers have significant investment intentions, an important feature of New Zealand’s strong economic performance in the 1950s.

China: It is now New Zealand’s largest export market and is expected to continue to grow by more than 7 per cent a year.

Christchurch rebuild: The inner-city rebuild programme should gather momentum when construction begins on the justice and emergency services precinct from March next year, to be followed by the health precinct in the June or September quarter. These projects, which are mainly funded by the Crown and city, should encourage private sector investment in the inner city.

Migration: The country has had strong net migration inflows in recent months and had total net migration of 17,490 for the 12 months ended October.

This figure is expected to increase steadily over the next few months, and Statistics New Zealand figures show more than 90 per cent of new arrivals settle in Auckland.

Housing: The strong migration inflow should continue to boost the housing market and housing construction, particularly in Auckland.

Government finances: The Crown’s financial deficit is falling and the Key Administration may announce tax cuts in May’s budget. However, large expenditures on the Christchurch rebuild may restrict this option.

Confidence: Business, consumer and farming confidence are all at, or near, all-time highs.

Companies: Most domestic companies have strong balance sheets and plenty of capacity to expand and invest. Rod Drury and Xero have lifted the ambitions of New Zealand companies and we now have a large number of young entrepreneurs with aggressive global aspirations.

KiwiSaver: Last but not least is KiwiSaver, which is giving us a pool of private permanent funds that can be partially invested in the domestic productive sector. KiwiSaver ought to have the same positive effect on the domestic economy as Australia’s compulsory superannuation has had on its economy.

In view of these factors the outlook for the New Zealand economy is exciting, the best it has been since the early 1970s.

The present export- and investment-led upturn could be maintained for several years – as long as dairy prices don’t collapse, the Chinese economy doesn’t go into an unexpected downturn and there isn’t an external shock like that of the mid-1970s. . .

Another threat would be a change of government.

Labour left office in 2008 forecasting a decade of deficits. National has turned that around in spite of the global financial crisis and the Christchurch earthquakes.

Policies espoused by Labour and other opposition parties show they have learned nothing from the mistakes which put New Zealand into recession before the rest of the world.

Gaynor isn’t the only one with a  positive view of the economy:

. . . Harbour Asset Management’s managing director Andrew Bascand says this year’s been a banner year for economic growth but next year’s likely to be even better.

“The outlook for 2014 is for better global economic growth – modestly better – and certainly for even stronger New Zealand economic growth,” Mr Bascand says.

“If there’s one key risk, it’s how households and businesses think of the rising interest rates environment, and a second risk is concerns around uncertainty with an election”. . . .

Reserve bank governor Graeme Wheeler has clearly signalled a rise in the official cash rate next year which will push up interest rates.

But given they are at historic lows that isn’t unexpected and it’s better to have slightly higher interest rates than let inflation get out of control.


Interest rates will rise

December 12, 2013

The Reserve Bank has kept  the official cash rate at 2.5% but clearly signalled an increase is likely next year.

Reserve Bank Governor Graeme Wheeler said: “Growth remains moderate but mixed for New Zealand’s main trading partners. Nevertheless, export prices for New Zealand’s main commodities, and especially dairy produce, have continued to increase.

“New Zealand’s GDP is estimated to have grown at over 3 percent in the year to the September quarter and the expansion in the economy has considerable momentum. New Zealand’s terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland.

“Continued fiscal consolidation and the high exchange rate will partly offset the strength in domestic demand. The high exchange rate is a particular headwind for the tradables sector and the Bank does not believe it is sustainable in the long run.

“House price inflation is high in Auckland and other regions due to the housing shortage, and demand pressures associated with low interest rates and rising net inward migration. Restrictions on high loan-to-value mortgage lending, introduced in October, should help slow house price inflation. Data to date are limited on the effects of these restrictions. We will continue to monitor outcomes in the housing market closely.

“Annual CPI inflation increased to 1.4 percent in the September quarter and inflation pressures are projected to increase. The extent and timing of such pressures will depend largely on movements in the exchange rate, changes in commodity prices, and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures.

“The Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint”.

Yesterday’s announcement by Fonterra that it was holding the forecast milk payout and reducing the dividend might have taken a little heat out of the market, but there are other pressures on inflation, not the least of which is house prices.

The bank removed restrictions on low loan to value ratios for the construction of new homes earlier this week after it became aware that this policy would reduce the housing supply which is one of the factors pushing up prices.

Restrictions remain for loans for existing houses and this is sensible.

If people are stretched to get and service a loan at current historically low interest rates even a small increase could over-stretch their budgets.

With only 10% equity in their properties a small change hey could well end up losing that and if forced to sell would not only lose their homes but still owe money.

 


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