Explosion or erosion

March 13, 2014

Yesterday morning Chris Trotter called the election for National unless something hugely dramatic happens between now and polling day.

In the afternoon Justice Minister Judith Collins had to apologise for not being as open as she should have been about her trip to China.

This morning, the Reserve Bank  is expected to announce an increase in the Official Cash Rate which will lead to an increase in interest rates.

That won’t come as any surprise when the OCR has been at a record low of 2.5% since March 2011.

It will be welcomed by those who get income from interest-bearing investments. It won’t be appreciated by the many more who have mortgages, even though interest rates will still be well below the 11% we were paying when Labour lost the 2008 election.

Neither of these are hugely dramatic and are unlikely by themselves to have much impact on the polls when Labour continues to be divided internally and confused about which coalition partners it would choose.

The odds still favour National, but when even a day can make a big difference, six months is time for an even bigger one.

Erosion over time can do as much damage as an explosion.


OCR unchanged for now

January 30, 2014

The Reserve Bank has left the Official Cash Rate at the record low 2.5%.

New Zealand’s economic expansion has considerable momentum. Prices for New Zealand’s export commodities remain very high, especially for dairy products. Consumer and business confidence are strong and the rapid rise in net inward migration over the past year has added to consumption and housing demand. Construction activity is being lifted by the Canterbury rebuild and by work in Auckland to address the housing shortage. Continued fiscal consolidation will partly offset the strength in demand. GDP grew by 3.5 percent in the year to September, and growth is expected to continue around this rate over the coming year.

While agricultural export prices are expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy. However, improvements in the major economies have required exceptional monetary accommodation and there remains uncertainty about the timing of withdrawal of this stimulus and its effects, especially on emerging market economies.

Annual CPI inflation was 1.6 percent in 2013, and forward-looking measures of firms’ pricing intentions have been rising. Construction costs are increasing and risk feeding through to broader costs in the economy. At the same time, there appears to have been some moderation in the housing market in recent months. The high exchange rate continues to dampen inflation in the traded goods sector, but the Bank does not believe the current level of the exchange rate is sustainable in the long run.

While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more-normal levels. The Bank expects to start this adjustment soon.

The Bank remains committed to increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point. The scale and speed of the rise in the OCR will depend on future economic indicators.

This gives a little breathing space before what is expected to be an increase in the OCR and subsequent increases in interest rates.

The message in this statement is clear – it’s not if there will be an increase but when.

That doesn’t just mean an increase on interest it will almost certainly put pressure on the value of our dollar.


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.

 


OCR unchanged

September 10, 2009

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 interest.co.nz


OCR unchanged

June 11, 2009

The Reserve Bank has left the Official Cash Rate unchanged.

This won’t impress the politicians who criticised trading banks for not dropping their interests rates.

But because we’re not good at saving ourselves our banks have to borrow money off-shore which makes the OCR only one of the factors affecting interest rates.

The media release isn’t on the Reserve Bank website yet so I’ve copied it below the break.

Read the rest of this entry »


Confidence up, OCR down

April 30, 2009

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.

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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.


OCR down to 3%

March 12, 2009

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.”


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