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.


Forgetting or ignoring?

March 24, 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

March 17, 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?

March 13, 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?

March 10, 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?

March 4, 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

October 7, 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.


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