Low spending, lower interest rates

12/06/2014

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.


Forgetting or ignoring?

24/03/2014

More headless chookery from Labour:

New Zealand’s interest rates are among the highest in the world and homeowners that are bearing the brunt of them should join Labour’s call for an Economic Upgrade, Labour Leader David Cunliffe says.

“New Zealand mortgage rates are higher than Australia and much of the developed world. That’s because our economy is not paying its way in the world and has major issues that need to be fixed. . .

Any difference in interest rates is a sign of the health of our economies. New Zealand’s is doing better than Australia’s.

That does present us with the threat of inflation which the Reserve Bank has a duty to keep under control.

That’s why the Official Cash Rate eased up from months at an historic low to 2.75 percent last week.

That’s no reason for Cunliffe to run round pretending the sky is falling.

Has he forgotten that people were paying around 11% on mortgages when the government in which he was a minister lost power in 2008?

Has he forgotten that one of the reasons for that was the high taxing, high spending policies of his government?

If he isn’t forgetting that then he’s ignoring the lessons from that and his own education which would be worse.

But that would explain why he’s peddling the unfortunately similar prescription of more tax, more churn, more spending which is what Labour policies announced so far threaten.


Left’s jiggery pokery won’t work

17/03/2014

I find it difficult to understand the headless chookery that’s going on about the very small increase in the official cash rate from a historically low level.

People with income from interest-bearing investments will be pleased and while the rest of us who are paying more for loans might not like it, we knew it was coming.

It was well signalled and anyone with the slightest bit of financial acumen would have known the odds of a rise were far greater than a fall or keeping the rate at its historic low of 2.5%.

In spite of this the opposition and some commentators are playing at Chicken Little, acting like the sky is falling and inevitably calling on the government to do something.

Well, the government is doing something.

Finance Minister Bill English told TVNZ’s Q+A programme that the Government is doing all it can to help households affected by interest rate rises:

“There isn’t some kind of magic solution her like jiggery-pokery with the Reserve Bank Act, or pretending prices are lower than they are, which is what the Greens and Labour are promising. It’s about the kind of diligent hard work we’ve all been doing, not just this government but households and businesses, becoming more productive, more careful with our spending, getting debt down, a bit less consumption, and good control of inflation. So we have the opportunity here for a sustained economic recovery, and if we work on keeping our costs down, increasing our productivity, we could have four or five years where there are more jobs and higher incomes, and that’s what helps households get on top of increases in interest rates.”

The government’s careful management and strict control on its spending are two reasons interest rates have been so low for so long.

The need to keep on that path is just as great now the economy is growing because a government splashing cash around would fuel inflation which in turn would put pressure on interest rates.

He said this week’s OCR increase is due to the relative strength of our economy

“The small increase in interest rates that was announced the other day is an indication of the relative strength of our economy. There’s a lot of economies around the world would like to see some signs that interest rates were reflecting the fact that the economy’s growing. The other job we have is to support households and businesses by doing everything a government can to reduce pressure on what are inevitably rising interest rates and we’re pretty clear about that where we can influence that pressure, it’s around the housing market where we spent two or three years working on improving supply to the housing market. It’s around the labour market where we’re doing our best to align our training systems and migration with the skills that are needed in a tight labour market. . . 

If there was a magic solution every country in the world would have employed it.

There isn’t – there’s the jiggery pokery the opposition are threatening us with which won’t work, or the careful management and restrained spending which the National-led government is doing that is working.


What would they do differently?

13/03/2014

Labour is threatening to tinker with the Reserve Bank Act to keep interest rates down.

They are conveniently forgetting that interest rates have been at an historic low for three years and interest rates were far higher when they were last in government.

The OCR increased by 5.00 in November 1999, went up and got to 6.50 in May 2000, stayed there until March 2001, went down to 6.25 and continued to drop until it got to 4.75 in November that year.

It was all up from there reaching 5.75 in August 2002 before going down again and getting to 5 in July 2003.

The reserve Bank increased it to 5.25 in January 2004 and it climbed from there, reaching 8.25 in July 2007 and staying there until it went down to 8 and was at 6.5 by October 2008.

National won the election in November and the OCR went down from then, getting to 2.5 in April 2009, increasing to 2.75 in June 2009 and 3 in July. It stayed there until March 2011 when it went down to 2.50 where it’s stayed until today.

OCR 2007-2009

Several factors have influenced the low rate, including the global financial crisis.

The government had no influence over that but it has had influence over its own spending which is another big influence on the OCR because of its impact on inflation.

National has been very prudent with its spending and intends to continue that as the economy grows.

Labour and its potential coalition partners appear to have no familiarity of the concept of fiscal prudence and should they get into government, their high-tax, high-spending policies would fuel inflation and drive up interest rates.

Labour couldn’t keep interest rates down last time it was in government.

What would it do differently if it was in power again?

It’s not going to rein in its own spending and tinkering with the Reserve Bank Act would do more harm than good.

It would lead to higher inflation which would do far more harm than the small increase in interest rates we got this morning.

Hat tip for chart: Keeping Stock.


How would Labour keep interest rates down?

10/03/2014

Labour leader David Cunliffe is threatening to tinker with the Reserve Bank Act:

. . .Mr Cunliffe said he believed in an independent central bank but Labour would make changes to the Reserve Bank Act that would lead to lower interest rates.

“On average, over time, it is our very clear view that interest rates would be lower. On average house mortgages would be lower under our monetary policy.”

“There would be additional tools that the Reserve Bank could use – macro-prudential and other tools – that would help stabilise high interest rates. . . .

What are those tools and how would they work?

Two of the biggest influences on interest rates are inflation and government spending.

Policies Labour’s announced so far would fuel inflation and require more government spending.

Rather than tinkering with the RBA, Labour would be better to rethink its policies and develop ones which would dampen inflation and curtail spending.

It’s probable that the official cash rate, and consequently interest rates, will rise soon. But they will still be well below the 11% we were having to pay when Labour lost office in 2008.

Are they going to spell out how they’d do much better next time they’re in government, or will it be a matter of wait-and-see for details which is all they’re offering with their power policy?

Photo: Labour’s been challenged for more details about its far left power policy with the Greens. The answer – ‘wait ’til after the election’. Is that okay with you? http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=11214563


What’s he offering?

04/03/2014

Liam Dann asks a very good question:

What is David Cunliffe offering? A dramatic experiment with a winning formula? A worrying fix for something that isn’t broken?

He’s referring to Labour’s determination to follow Green Party policy to meddle with the Reserve Bank.

Labour’s embrace of Green Party policy to reform the Reserve Bank Act is a big stumbling block for the party if it wants mainstream acceptance from the business community.

It surely gains the party few fresh votes from the wide pool of mainstream voters who find monetary policy debate arcane.

Yet it makes Labour almost impossible to endorse for many of the nation’s most powerful and influential business leaders.

The monetary policy reformists are full of ideas about the magic a broader definition of the Reserve Bank Act might achieve. But they ignore the extent to which having one target – inflation – has worked. And just how fundamental controlling inflation is to creating a stable economy on which growth can be built.

Why, when the Act has just seen us through such an enormous global downturn so efficiently, would you change it. In the hope it might bring the dollar down?

Well, if you damage the economy the dollar will certainly fall. But it seems a brutal path to take.

And why, if you were going to make changes, would you loosen the shackles during the growth phase of the economic cycle – just when inflation starts to become a serious risk.

We should be grateful we don’t have to make radical changes to our economy. We’ve come through the downturn well, and while National can take some credit for steering the ship, so too can the last Labour Government for the healthy growth it oversaw.

Radical change is for those nations that have run out of options. Let’s leave it to the Greeks.

National has generally trod a cautious path, some would say too cautious. But it’s getting results.

The economy is growing, and other economic indicators like business confidence, investment intentions and employment are positive.

All of this would be at risk if inflation is let loose with the inevitable steep increase in interest rates that would follow.

In 2008, when Labour was last in power interest rates were about 11%.

Now they’re about half that and while they’re expected to rise providing inflation is kept under control, they shouldn’t get back to double figures.

But if a Labour/Green government starts meddling with the RBA, inflation will surge and interest rates will  too with the high cost that imposes on business and households.

If people are concerned about the affordability of houses and farms now, how much worse will it be when interest rates are twice the current rate, or higher?

That’s what Cunliffe is offering.


Many factors affect affordability

07/10/2013

Housing affordability has become the cause de jour.

Most comments on it refer to price but there are many factors which affect affordability and one of those is interest rates.

The Reserve Bank has said the official cash rate could increase by 2% from 2014 to the beginning of 2016, which could mean interest rates on first mortgages of 7 – 8%.

Speaking on TV3’s The Nation programme on Saturday, Dr Smith said interest rates had been at historic lows for some time, and at some point they would increase again.

He said it was inevitable as the economy improved that the 50-year low mortgage interest rates would rise. . .

This is stating the obvious.

It is very unlikely that interest rates will go down and much more likely they will rise than stay where they are.

This is one of the reasons it’s important that people aren’t encouraged to over-stretch themselves when borrowing.

Very little equity in a property could turn into none, or less, with a small fall in property prices and even a slight increase in interest rates would impose a big extra cost on a large mortgage.

Those of us who farmed our way through the ag-sag of the 80s know this only too well.

“What we want to do as a Government is to make sure that our fiscal policy and the way in which we are managing the economy keeps access for New Zealanders to low interest rates for as long as possible.”

If interest rates go up the dollar will almost certainly follow making exports less competitive and that will hurt all of us.

We need continued discipline in government spending and polices which promote saving, investment and export-led growth not those pedalled by the opposition which are even worse than the ones which put New Zealand into recession before the global financial crisis hit.


Low inflation, low interest rates

18/07/2012

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.

 

 

 


RB unhappy with long term interest rates

01/04/2009

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.

Interest.co.nz  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.


Negotiating from position of strength

04/12/2008

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:

jock

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


How bad will it get?

07/10/2008

Adolf Fiinkensein over at No Minister  thinks the dairy industry’s a bit off colour and it’s going to infect the rest of the country.

He bases his diagnosis on five symptoms:

1 Sliding world commodity prices for dairy products

2 The melamine scare in China and other Asian countries.

3 The world wide credit crunch caused in the first instance by the Democratic Party’s drive for ‘affordable housing’ for indigent blacks and the subsequent sub-prime fiasco.

4 Most of our major farm banks are Australian owned. (Australians don’t understand NZ agriculture)

5 Our trading banks’ attitude to risk and their habit of re-rating individual client risk from time to time.

I agree dairying is not at the peak of health it was a few months ago, but my prognosis is more positive than Adolf’s.

To address his points:

1. World prices for dairy products are going down but this is a correction after hitting a record high. They’re still well above the historical average and while they’re likely to be volatile in the short term they’re unlikely to go right back to where they were before the boom and the medium to long term outlook is positive. As Adolf notes the dollar is going down and that will help off-set any decline in commodity prices.

2. The melamine scare may actually help us because although Fonterra is a minority shareholder in San Lu, more than 30 companies were also victims of the poisoning. Because of that it’s regarded as a Chinese problem and companies which had used Chinese milk, in China and other countries, will be looking for suppliers whose milk they can trust – and one of the first they’ll come to is Fonterra.

3. The credit crunch is already having an impact. Mataura Valley Milk has put construction of its new plant near Gore on hold; planned dairy conversions are on hold and farmers are closing their cheque books. That will have a negative impact on the people who supply and service them but as long as the farmers have reasonable equity they’ll weather the storm.

4. Regardless of who owns them, the banks employ people who understand agriculture here and they’re not going to want to threaten their equity by doing anything which will put a farming business at risk if they can avoid it.

5. If banks are worried about their debtors, and they have reason to be, I think those who’ve borrowed for houses will have more to worry about than dairy farmers.

People who converted for this season or are in the process of converting for next season, who budgeted on a higher payout than is now expected and have little equity will be overstretched. However, one good thing about dairy farming is the cash flow. Unlike sheep, beef and cropping where you get one or two large payments a year, dairy farmers get paid each month and as long as the banks get their share of that they will probably be prepared to watch and wait.

As well as that, interest rates are likely to come down and providing the banks are reasonably confident of farmers’ performance in the medium term they will probably give them a bit of leeway in the short term to allow them to farm their way out of trouble.

That doesn’t mean everything on the farm is rosy, but it’s nowhere near as bad as it was in the 1980s.

Then we’d been dependent on subsidies which were stripped away but the economy was still highly regulated; inflation was over 20% and interest rates were higher still.

We’ve adjusted to life without subsidies and are stronger because of it; and  in spite of Labour’s scorn for the “failed” polices of the 80s and 90s, they’ve left them more or less alone so the economy is freer and stronger. Interest rates are higher than desirable but they’re likely to come down and while inflation too is above the comfort level, it’s still well below the levels we faced in the 80s.

Dairying accounts for about 25% of our exports so Adolf is right that if its off colour the rest of the country will catch the bug. There’s no doubt the economy is sick,  and dairying will be affected, but because it was fitter to start with it’s better equipped to withstand the infection than most other sectors.


$NZ follows interest rates down

12/09/2008


OCR down 50 points

11/09/2008

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.


Exporters Irked by Nat’s Monetary Policy Stance

08/07/2008

The NZ Manufacturers and Exporters Association is not impressed by National’s support for the current monetary policy.

The party’s defence of the current system failed to acknowledge the damage the policy had caused to New Zealand’s tradeable sector, association chief executive John Walley said.

The approach used interest rates dictated by the Reserve Bank’s official cash rate to curb demand and influence inflation.

That approach had seen exports dropping from 33% of GDP in 2001 to 22% in 2007.

“What we are seeing at the moment is increasing fuel and commodity prices driving inflation which in turn is holding up interest rates and exchange rates.

“These forces are unlikely to stop any time soon so we need to break the link between inflation and the exchange rate,” he said.

He’s right about the problems but I’m not convinced playing politics with monetary policy is the solution.

Associate Finance Minister Trevor Mallard last week announced that the Government was open to looking at alternative monetary policy settings.

National finance spokesman Bill English said now was not the time to start tinkering with a monetary framework.

The Reserve Bank recognised the effect that international oil and food prices were having and the central bank was not going to strangle the economy because of imported inflation.

“It has been well recognised by government officials and commentators that increases in government spending, poor quality spending and increases in government charges are also stoking inflation domestically,” Mr English said.

“Trevor Mallard would be well advised to focus on these inflation factors, rather than signalling a drastic rethink on monetary policy,” Mr English said.

Quite. I have never been able to understand Labour’s belief that their spending of public money is not inflationary but allowing us to keep more of what we earn would be.

Mr Walley hoped National was making a typical election-year response.

Unless policy changes were made, all that could be expected was more of the same as the trade balance deteriorated and the economic situation worsened, he said.

A more responsible approach to the spending of public money might make a difference without the need to make monetary policy a party political issue.


Politicising the Apolitical

03/07/2008

Some policy areas are supposed to be kept clear of party politics.

Labour trampled all over the convention that consitutional matters were in that category with the Electoral Finance Act. Now they look set to do it again with monetary policy. 

The Government is signalling a change in the way the Reserve Bank fights inflation in what could mark the first major shift away from the bank’s focus on interest rates as its sole weapon.

 It is understood the Government has decided to give up on seeking consensus with National over possible changes and will go it alone.

That could see it campaigning on changes to the policy targets agreement between the finance minister and the governor of the bank – or even changes as radical as amendments to the Reserve Bank Act itself.

I am concerned because Labour: 

          * is abandoning a bi-partisan approach to monetary policy;

           * has not learned from the EFA debacle that they should not play politics with matters which need to have at least bipartisan and preferably cross-party support.

           * has made no effort to cut back their own profligate spending of taxpayers’ money which has made  a significant contribution to inflation.

           * is prepared to put short term politics before the long term interest of the country by abandoning the fight against inflation.

Inflation is theft which hits the poorest hardest.

There may be better ways to fight it than interest rates – but that should be determined by cross-party concensus not by petty party politics in a desperate bid to turn the polls around.

The Visible Hand In Ecnomics is troubled by this and is calling for submissions on it.

Hat Tip: Adam Smith


Country Could Weather Economic Storm Better Than Cities

05/06/2008

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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