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.


Exchange rate like the weather

July 23, 2010

The New Zealand dollar went up last night and is in sight of 2010 highs.

Every time this happens we get discussions on the exchange rate, the Reserve Bank Act and whether the latter should be changed to allow regulation of the former.

In spite of Labour’s mutterings on this – which is evidence more of an acknowledgement it’s unlikely to return to government soon than a real desire to meddle – there is very unlikely to be any change to the policy of a floating dollar.

Just like the weather the exchange rate is beyond our control. We can’t change it, we have to learn to manage its affects.


Politicising the Apolitical

July 3, 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


%d bloggers like this: