Explosion or erosion

13/03/2014

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

30/01/2014

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

12/12/2013

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

10/09/2009

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

11/06/2009

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

30/04/2009

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.

dairy-100012

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%

12/03/2009

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.”


Bollard taking us back to the 50s

29/01/2009

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%.


OCR down to 5%

04/12/2008

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.


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.


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