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RBNZ lifts OCR by 25 bps to 3% as expected; repeats that high NZ$ not sustainable, but also says it is reducing inflationary pressures

RBNZ lifts OCR by 25 bps to 3% as expected; repeats that high NZ$ not sustainable, but also says it is reducing inflationary pressures
Reserve Bank Governor Graeme Wheeler

By Bernard Hickey

The Reserve Bank has hiked the Official Cash Rate by a further 25 basis points to 3%, as widely expected, and has repeated its warning the high New Zealand dollar is not sustainable.

However, it also introduced a comment about the high New Zealand dollar leading to lower inflationary pressure in its outlook for interest rates, suggesting continued strength may take some of the pressure off interest rates in future. The New Zealand dollar rose 30-40 basis points to 86.2 US immediately after the statement, which could be read as giving a green light for more currency strength. ANZ lifted its floating mortgage rate and main deposit rate by 25 basis points within an hour of the announcement. See Gareth Vaughan's article here.

The bank virtually repeated its comments on the economy, inflation and interest rates word for word from its March 13 summary. The only minor change was the comment about the high exchange rate lowering inflationary pressure and how the bank was taking that into account in its interest rate outlook.

"Headline inflation is moderate, but inflationary pressures are increasing and are expected to continue doing so over the next two years," Governor Graeme Wheeler said in a statement.

This OCR decision is the 'in-between' six-paragraph statement released in between full quarterly Monetary Policy Statements that include fresh forecasts, extra commentary, a news conference and a Parliamentary Select Committee appearance by the bank's governors.

The March 13 Monetary Policy Statement included the bank's forecast that short term interest rates would rise by more than 2% to over 5% over the next two years, suggesting floating mortgage rates would rise to over 8%. The next full set of forecasts and commentary is due on June 12.

"In this environment it is important that inflation expectations remain contained," Wheeler said. "To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand," he said.

"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure," he said. "By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained."

Economist reaction:

ASB Chief Economist Nick Tuffley said he now expected the Reserve Bank to hike again in June, but then have an extended pause.

"The RBNZ noted downside risk factors such as weaker dairy prices and the high NZD but did not appear overly concerned about their impact at this stage. And the RBNZ remains very upbeat about the growth outlook," Tuffley said.

"A June OCR increase is, however, more event-dependent than the last 2 increases have been."

ANZ Chief Economist Cameron Bagrie said the bank's statement was consistent with its March forecast for 200 basis points of OCR rises in two years.

"We continue to expect another 50 basis points of OCR rises before the end of the year, with the next hike to come in June. July cannot be ruled out if pricing intentions and inflation expectations start to move," Bagrie said.

He also pointed to the Reserve Bank's comment on the high currency easing inflation pressure.

"So we have somewhat of a currency hook. But for the currency to stymie the outlook for OCR hikes it has to change the outlook for jobs, and we don’t think that’s around the corner," Bagrie said.

"The best we can say is that the currency will influence the speed of the withdrawal of policy stimulus, as opposed to halt it in its tracks," he said.

Westpac Chief Economist Dominick Stephens said he still expected another hike in June, followed by one each in July and December, although the high currency now meant the July hike would be a close call. He said the Reserve Bank was probably now only looking at increasing the OCR by 175 basis points over the next two years, rather than the 200 basis points forecast in March.

"Absent any major surprises, the RBNZ will use the June Monetary Policy Statement to signal this slight moderation to the outlook for the OCR," Stephens said.

"The RBNZ will no-doubt also use the June MPS to clarify whether or not it intends to hike in July. Which way it leans is a fifty-fifty call. We are plumping for a June MPS that does signal a July hike. But we admit there is a strong chance that instead, the RBNZ will use the June MPS to announce a pause in the tightening cycle. In the latter scenario the next OCR hike would be delayed until September or October (with the timing of the election playing no role in the decision)," he said.

BNZ's Head of Research Stephen Toplis said he still expected two more hike in June and July. He said the TWI is around 2.3% above where the bank had assumed it would be, which would reduce CPI inflation by around 0.5%.

"It’s really hard for the RBNZ to justify rate hikes if its forecast inflation falls well below the mid-point of its target band. Therefore, it is safe to say that the longer the currency stays higher, the greater the chance that there is a pause in the tightening process. The RBNZ can tell all in June," Toplis said.

"Be that as it may, the key message remains the same. Don’t overlook that the first half of the statement speaks of a booming economy. Accordingly, the cash rate needs to get back to neutral, in the first instance, which is around 4.25 – 4.50%. It then needs to head above this level to hold in check domestic demand.  Assuming that the NZD eventually falls, all that near term strength will do is effect the timing of rate increases and not the eventual extent," he said.

JP Morgan Economist Ben Jarman said a June 12 pause was now possible.

"We see the RBNZ as likely to pause at one of the next two meetings, with our preference being the next decision, in June. Inflation has been the missing link to the narrative throughout the growth upswing, and following last week’s downside surprise for 1Q, we view the RBNZ as needing to see evidence that it is playing to script and moving up in convincing fashion to deliver the next hike, and the next such reading is not delivered until July," Jarman said.

Political reaction:

Labour Finance spokesman David Parker said the rate hike would not have been necessary if the Government had properly targeted the sources of inflation.Today’s interest rate rise wouldn’t have been necessary if the Government had been doing its job properly and targeting the sources of inflation, Labour says.

“The Government has dropped the ball on this. It could have been doing so much more. We will, and will be releasing details of how we will go about that next Tuesday,” David Parker said, referring to a speech he will give in Auckland on Monetary Policy.

Parker said Labour’s Kiwibuild policy (where the Government would build 100,000 houses in 10 years), its capital gains tax, controls on foreign ownership, and providing the Reserve Bank with more tools would stabilise inflationary pressures and mean that today’s rate hike was not necessary.

Labour Housing spokesman Phil Twyford said rates could peak at a level which would see first-home buyers in Auckland spending two-thirds of household income paying the mortgage. The Roost home loan affordability reports for March showed the biggest worsening in 12 years as interest rates and house prices rose.

“We have had five years of out-of-control house price increases which have seen the average Auckland house rise over 40 per cent while National has been in government," Twyford said.

“National’s failure to get a grip on the housing crisis – its refusal to tax speculators or build large numbers of new homes – is one of the reasons the Reserve Bank wants to put interest rates up. Low interest rates caused by the Global Financial Crisis, and the lack of demand in the economy, were the only thing good thing National could point to," he said.

“NZ interest rates are already higher than the rest of the developed world. Despite dropping export prices our exchange rate is going up with continuing job losses in export industries like forestry. Something has to change,” he said.

Green Party Co-leader Metiria Turei said the rate hike was a result of the Government's failure to limit power price inflation and the Auckland property market.

"The Green Party has long suggested a more actively managed housing sector to reduce housing speculation. As well, the unfettered electricity market, where prices are spiralling upward despite demand going down, is clearly not working," Turei said.

'We will introduce a capital gains tax, place restrictions on the foreign buy-up of housing, initiate a government-led programme of affordable house building, and introduce Progressive Ownership for first home buyers to stabilise house prices," she said.

Parsing the statements:

It can be useful to compare the Reserve Bank's summary statements paragraph-by-paragraph to see how the bank's thinking has changed. Here's the comparison, with today's statement, followed by the March 13 statement, and an explanation of the difference.

April 24 - The Reserve Bank today increased the OCR by 25 basis points to 3 percent. New Zealand’s economic expansion has considerable momentum, with GDP estimated to have grown by 3.5 percent in the year to March. Growth is gradually increasing in New Zealand’s trading partners, but inflation in those economies remains low. Global financial conditions continue to be very accommodating.

March 13 - The Reserve Bank today increased the OCR by 25 basis points to 2.75 percent. New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand’s trading partners. However, improvements in major economies have required exceptional support from monetary policy. Global financial conditions continue to be very accommodating, with bond yields in most advanced countries low and equity markets performing strongly.

The difference: The Reserve Bank has revised up its March quarter growth forecast slightly to 3.5% from 3.3%. The editing was also tighter, which is much appreciated.

April 24 - Prices for New Zealand’s export commodities remain very high, though auction prices for dairy products have fallen by 20 percent in recent months. Domestically, the extended period of low interest rates and strong growth in construction sector activity are supporting the recovery. Net immigration continues to increase, boosting housing and consumer demand. Confidence remains very high among households and businesses, and measures of investment and employment intentions are positive.

March 13 - Prices for New Zealand’s export commodities remain very high, and especially for dairy. Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery. A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand. Confidence is very high among consumers and businesses, and hiring and investment intentions continue to increase.

The difference: The Reserve Bank noted the 20% fall in dairy prices in recent months. It has also reiterated its comments about the effects of strong net migration on growth and the housing markets, which is topical given Wednesday's very strong migration figures for the year to March.

April 24 - Spare capacity is being absorbed, and inflationary pressures are becoming apparent, especially in construction and other non-tradable sectors. The high exchange rate remains a headwind to the tradables sector, and along with low import price inflation has been holding down tradables inflation. The Bank does not believe the current level of the exchange rate is sustainable.

March 13 - Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradables sector. In the tradables sector, weak import price inflation and the high exchange rate have held down inflation. The high exchange rate remains a headwind to the tradables sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run.

The difference: The Reserve Bank has specifically singled out the construction sector as a source of inflation. The only slight difference in the bank's warning about the high New Zealand dollar is that it has dropped the qualifier about it being not sustainable "in the long run", suggesting it sees it as immediately unsustainable.

April 24 - There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are easing pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration is adding to housing demand.

March 13 - There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration flows will remain an offsetting influence.

The difference: Virtually no change, except the qualifier about the high LVR speed limits 'starting' to ease pressure on the market has been dropped. It clearly is now easing pressure on the market.

April 24 - Headline inflation is moderate, but inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure.

March 13 - While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures.

The difference: This section is where the Reserve Bank has made its most significant tweak to its statement. It has introduced the variable of the high exchange rate directly into its assessment of how quickly it will need to increase the OCR. This is the key phrase about how the OCR will be raised depending on the bank's assessment of inflationary pressures: "including the extent to which the high exchange rate leads to lower inflationary pressure."

This suggests that if the exchange stays higher for longer, then the Reserve Bank may not have to increase the OCR as much as it previously thought. It means the tradeables sector, which includes exporters and those who compete with imports, is doing a lot of the heavy lifting of fighting inflation. Some might see this as a green light for a higher currency, giving the Reserve Bank sees it as one way to fight inflation.

April 24 - By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained.

March 13 - By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained.

The difference: Not a sausage. Or even a comma.

(Updated with parsing of the statements, jump in NZ dollar, political reaction, economist reaction)

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89 Comments

Floating interest rates to 8%? I guess he doesn't want people with mortgages spending any money.

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Those borrowers who factored in higher rates when doing their calculations as to how much they should borrow still have money to spend.

They were smart.

 

Those who were "full speed ahead and damn the torpedoes" in their debt levels will be starting to feel the hurt.

Unless they were also smart and fixed for 5 years 6 to 12 months ago....then they probably couldn't care less.

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"full speed ahead and damn the torpedoes"

So you mean any poor sod IE John and Jane; buying their first home and having to borrow 90% of the purchase price?  Yes well those silly twenty to thirty somethings wanting to actually own their own home. Why didn't they just buy another flatscreen and ipad 5s and rent for another 5 years or so.

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Yes poor John and Jane who said, stuff worrying about interest rates, lets just get the most we can afford now with rates at historic lows, someone else will bail us out surely.  Stuff looking a little bit further out for something we can afford if rates go higher.  Stuff looking for something smaller.  

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And there is the comment we have all been waiting for: Just buy in Huntly and commute ect ect
Or: just wait and save longer - mean while house prices go up faster then you can save the deposit for.

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Tim, easy to say its not their fault. Interest rates do not stay at historic lows forever, and if you haven't budgeted to be able to readjust your budget to accomodate for a say 7-8% mortgage rate, you should never have bought in the first place. Don't get me wrong here, there's no question to my mind that FHBs have got it really tough at the moment, but then the various generations have had their own issues to content with themselves that this generation of FHBs haven't; world wars, 66% tax rates, 22% mortgage rates etc. When rates rise and it hits the fan for some, whether they pay the price themselves, or someone else has to bail them out as dtcarter says, it was their decision to put themselves at risk, no one else..their timing sucked through impatience. And if there are other issues going on, it may mean that bail outs may not be possible via interest rates, or if it is, not early enough for some not to suffer big losses.

There is no inherent right for anyone to own a home, even although it is a good thing to be able to do. Many in the world, and many in NZ either choose not to or will never be able to afford to. Many others shouldn't until they actually can, and if their preferred timing had been in recent years, yes it would have been a long wait until either the market corrects, or their financial situation improves enough to be able to afford not only a medium level of interest rates, but a temporay spike as well (or otherwise afford fixed rates).   

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Interest rates do not stay at historic lows forever......

http://www.global-rates.com/interest-rates/central-banks/central-bank-japan/boj-interest-rate.aspx

Sometimes they go up a little bit, then back down again.

But yes, budgeting for a worse case scenario if taking on debt would be the prudent thing to do.

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Those are fair points Grant, and carry a lot of truth. I was however as you can see from my first post reffering to discresionary spending - not people being bankrupt/mortgagee sale/ walking away from their house.

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I understand Tim, I was probably more focused on the last two posts but see your full context now. I guess in the end, it is what the RBNZ wants, people to spend a little less as rates go higher tro levels where it dfoes impact on average.

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because we all know how forcing people to spend less is good for NZ businesses, eh!

and that such business, with high wage rates to pay for are going to have to get _yet_more_ funds from somewhere (especially with councils trying to work out how to extract more from them).... 

Interest cost rises, on top of wage pressure demands...?  to push inflation down??  

Someone been at the Glenlivet for too long....

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Spot-on Spottie.....saw the imminent rise in swaps last May (not a false start like before then) and chucked all 3 mortgages from 5.1% floating onto 5-year fixed @ 5.9% ....believe me I had some reservations but I'm glad I trusted my gut on the rises continuing...no regrets for sure!

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I would be surprised if these 2 small changes are hurting many at the moment, if they are well the borrower(s) was in deep doo doo already.

"smart" well if you fixed for 5 years 6~12 months ago the rate difference is/was 7.00% (approx)  v 5.65% (approx).  So in the last 6~12months you have paid $s for that and it looks like that will continue for another 1 to 2 years. Personally I wouldnt say it was "smart " as we dont know where the rates will be in 3 years time say...hindsight will be 20/20, "cautious" yes OK...

My view on the other hand is I see continued long term and re-occuring recessions hammering down on rising OCR "wishes"....

regards

 

 

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Looks like floating mortgage is the best bet then! Not sure Wheeler is on the right track here but time will tell. Increasingly likely that USA and Europe will have to cut rates and continue printing. Perhaps Wheeler just putting the rates up so that he has the capacity/headroom to slash them again within 12 months?

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On what evidence do you see that USA will cut rates and continue printing?  What will they cut rates to? They are already at the bottom.  Do you see negative rates?

 

Why would they continue printing when they are already implementing their timetable to stop printing, and economic data has remained consistent with that.  Have i missed a run of negative economic data?

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Good news though if you are travelling overseas or importing. Price of European and USA made cars should drop - good time to crunch your car dealer.

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Obviously best to stay floating or 6 month fixed.

This will speed up deflation medium term, as consumers button down the hatches again.

Deflation is the risk atm,,  bank economists are in a 2004 time warp.

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Agree.

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How long has Grayham been on the payrole of the aussie banks? They must be laughing their heads off. Stop inflation by raising it? Yeah that makes sense(not!)
NZ gotta wise up. cannot apply large scale economic models to a 'country' which is smaller than average size city. You wanna cool borrowings and excessive debt risk? Pass a law that limits lending duration time. put it the back on the banks and watch them cool off reckless lending then.

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The thing is: mortgages are for such a long term these days, that even if someone has fixed their mortgage rate for 5 yrs, very little principal will have been paid off over that time, so when their mortgage rate does go up, its goin to be a very VERY big jump in terms of payments.

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Many don't realize that as long as the current interest rate for whatever rate you chose is higher than when you fixed it, then you can throw as much money as you want at your mortgage to reduce the principal and not have to pay any early repayment costs....we do extra payment all the time, as long as rates are rising the benefits are as flexible as if you were on floating.

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Many don't realize that as long as the current interest rate for whatever rate you chose is higher than when you fixed it, then you can throw as much money as you want at your mortgage to reduce the principal and not have to pay any early repayment costs....we do extra payment all the time, as long as rates are rising the benefits are as flexible as if you were on floating.

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Matthew can you please explain to us why you think that banks want higher rates ?

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They fund for near zero and collect the difference.

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Sorry Matthew where/how do they fund at zero, or even close to zero ?

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That article doesn't mention actual rates, but does link to an article about a recent raising by 3 banks led by WestPacTrust.

"The floating interest rate on the senior, unsecured and unsubordinated Westpac bonds will be a margin of 155 basis points over the 90 day bank bill rate with the initial rate to be set on Friday. Based on the current bank bill rate, the interest rate will be about 4.30%. "

 

so 4.3% is zero?

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"The Westpac and Rabobank debt issues come on the heels of ANZ New Zealand confirming last Fridayit was raising NZ$250 million through a seven-year retail bond issue that will pay annual interest of 6.25%."

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Obviously it seems to be zero in some peoples mind dtcarter - unfair though to point out the obvious on here when you don't actually need any facts to make a bold statement. What others don't understand is if banks did come under incerasing pressure from rating agencies  on their offshore funding percentages, and they had to pay up further for local deposit rates (I wouldn't be complaining), guess what that means for borrowers interest rates? (hint, higher). Strange it being highlighted by a poster still claiming rate cuts coming from 2.50%

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Anyone care to explain how fractional reserve banking comes into all this? Do the banks actually need to source every dollar they lend, or just a fraction of it? 

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Refer my post further down. No wonder growth is deemed to be needed to keep things afloat

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This monetary policy trajectory  is frankly, ill-conceived .

We know that higher interest rates stoke the currency , so why do we do it ?

Secondly , we also know that interest rate increases are themsleves inflationary , are a cost to business , who simply pass it on , leading to higher prices ( ie more inflation ). 

The argument that competition keeps prices in check is nonsense , the entire economy is made up of monopolies , oligopolies,  price fixing cartels ,  tarrif protected businesses , and collusive and leader-follower pricing activities generally .

Lastly , I see no evidence of rampant price increases , and any price increases seem to be sector specific ( construction being one )

Our personal experience is that there may even be deflation

  • Our grocery bill is static.
  • Our petrol and diesel card is the same as it was in 2012
  • Electricity and gas (with Genesis) has come down when we moved to a new plan
  • Our clothing spend is down
  • Our big screen TV cost less than the last one we bought in 2009
  • As did our new laptops
  • Our North Shore rates dropped with the Auckland unicity merger
  • Our business rent dropped when we renewed the lease for our practice.  
  • We have increased online spending with Amazon etc   on things ( like gifts , sports goods and books) , and reduced local spending on this type of stuff becasue its 1/3rd of the local price
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Auckland house price inflation. 

I suspect there is a lot of mortgage equity withdrawal going on, stoking inflation.

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FYI updated with comments from Labour and Green, and also from economists.

cheers

Bernard

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Banks don't tell them, consumers tell them that theyre confident ostrich i.e. surveys.

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LOL classic...could well be right Andrew

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AND I see it Japanese Govt backed so why can't our govt do a bit of the same so stuff remains in THIS country. We are mad and getting madder

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Short answer Raegun, because we are borrowers to buy houses, not savers and investors to buy other people's business such as the Japanese are. We need to be careful about who we're mad with.

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We are mad, as in crazy but if we were mad as in p...ed off it would be at ourselves. Then again I've been speaking out against foreign ownership of everything. And for my money it is the reason why we are driven to grow, grow as we keep flogging off our stuff

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I agree in that yes we'd much refer it was us doing the buying, but the question is why are foreigners able to buy these assets and not a NZ investor ? 

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"ANZ lifted its floating mortgage rate and main deposit rate by 25 basis points within an hour of the announcement."

Maybe if you read?

Simple if who you are with wants to wait a month, tell them you are going to move to ANZ.

regards

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The political comments shurely need a translation:

 

Parker:  "..will be releasing details of how we will go about that next Tuesday"

 

Translation - That'll give us the whole long weekend to mash-up some new handout that the suckaz will fall for.  Hey, purchasing votes is NOT inflationary.  Who said that??  You - at the back - did You support Shane Jones too?   Squire, my cross-bow, if you will.  My quarrel will settle That issue....

 

Normal Russian:  "I've left all the commentary to my capable offsider, who despite her minimal understanding of business, economics and lying with a straight face, will no doubt add considerable gravitas to the debate.  Me?  I'm designing my throne-room - oops, I mean, Finance Central Planning Department."

 

Meretricious Turk:  "..suggested a more actively managed housing sector...unfettered electricity market..is clearly not working" 

 

Translation:  We're gonna micro-manage every aspect of this economy until its pips squeak.  Or its horrible, fossil-fuelled wheels fall off.  Or something.  My esteemed co-leader is currently Planning all possible scenarios.

 

Every such micro-manager (and there will be uncountable thousands of 'em) will, of course, be paid the Minimum Living Wage.  

 

This is NOT inflationary.  Who said that?  You - at the back - do You support Naked Capitalism?  Colleagues, this deluded soul needs another fiteen choruses of Kumbayah.  A-one - a-two - a-three -  Kumbayah, my lord.....

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Waymad - Post of the week to my mind

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In 2003 the OCR was 4.75% while 2yr mortgage rates were 5.95% 

Still plenty of margin to be sqeezed yet. 

 

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Understand what the GFC did to bank funding spreads MB - read the article you posted about rating agencies pressure on banks.  Around 1.0%- 1.5%  of their current margins are just paying for that funding cost before you actually add the credit margin to that (i.e. the bit that pays for their own admion costs and a profit margin. While that spread will quietly fall over the next few years barring another crisis,  bank mortgage rates aren't going back to the likes of bank bill rate plus1% as they were pre-GFC any time in the next few years, if ever..the world has changed.

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I think this is a difficult situation for the average kiwi. To me the inflation has resulted from rising house prices, the canterbury earthquake rebuild and strong dairy prices.

The housing market could have been influenced by overseas buyer restrictions (as many other countries have) but the government has little political courage.

It doesn't seem we have a widespread economic recovery which would be benefitting most households - the labour market is still very tight- so only pain from higher interest rates for the typical household. Yay!

Wheeler's a hawk like Brash was so I expect at least one more rate hike before he has a breather for a cup of tea.

 

 

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Rising interest rates will see rising asset yields across the board.

This includes property.

I fully expect rising rents in the housing market. Happy renters should beware... landlords should :)

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But falling asset prices. No wait a minute that doesn't make sense, its  rising interest rates =rising asset prices, = rising rents. Falling interest rates, = rising assets = rising rents.

Eureka you have found the ultimate, 'Win Win'.

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Ipso facto, the speculative money (that includes he dirty stuff) will cut and run at any cost, so making the falls greater than otherwise  ( 2000 tech mirror?)

 

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ostrich, you are yet another on this website predicting a collapse in house prices.

How long have many people here at interest.co.nz been predicting a collapse in house prices?

The world has gone through one of the worst economic periods since the Great Depression and house prices are on average higher than ever.

Why should they collapse now?

PS: So many Y2K tech stocks in that boom were earning no income. Houses earn rental income. 'Happy renters' will ensure they keep earning rental income.

All landlords are smiling right now ostrich.

 

 

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Rising interest rates will destroy yeilds where a real good is made.  ie you cant make some things more expensive unless wages increase as well otherwise the cash strapped will do without something(s).  In those sectors that are then not selling we'll see deflation or the good will disappear as the business closes and hence job losses.  

I dont know hwere you get your economics ideas from but they cant be based on watching what is going on around us, or you cant see past the end of your nose.

regards

 

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Awesome - if the dollars going up it's time to book an overseas holiday on the revolving line of credit. 

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There are still good deals to be achieved out there, banks are still willing to trim their margins to entice new business.

I managed to secure a 3 year fixed rate mortgage @ 5.99% plus  a $3500 "sweetener" by switching from one major lender to another. Admittedly about a $1000 of that will be used in legal fees. However this was secured yesterday after the OCR announcement! 

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http://en.wikipedia.org/wiki/Fractional_reserve_banking

 

Some great example charts included for our very own " Yes bank"

 

very interesting reading

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We have the highest interest rates in the developed world.

We have escaped the global recession by the skin of our teeth. Most NZ-ers have not had a wage rise since 2008.

So we are raising our interest rates too early, in order to stifle growth.

Which prices will be suppressed by this rate hike? 

The banks are to be congratulated fo their successful lobbying.

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yes, but, ssshhh, the RB doesnt like having reality pointed out to them...

So they'll get it slapped in their faces.

regards

 

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Raising the OCR is not going to stop inflation (the small amount there is) as our current inflation is not being driven by excessive borrowing or exuberant consumer spending.

Raising the OCR is not going to suppress Auckland house prices in the select areas as prices are being driven by foreign investors/buyers and landlords who are not affected by interest rates (much).

Our rates are not currently 'low',  They have been high even since the GFC -  the public are being sold misinformation about our 'historically low' rates. 

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Well, at least RBNZ will have some headroom once deflation sets in.

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I think he's thinking that for the 2% inflation target we need an OCR of about 4%.  So 3% is to low, hence he has to rise, no matter the pain. What it appears he cant see is the paradgym shift that was peak oil in 2006 and how its made his economics mantra, obsolete...

Could be worse, we could have say Brash.

regards

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Kimy - central banks have models that forecast future inflation, and from what we've seen in the recent past (2003-07), which tend to understate how high it actually goes. Unless you personally have a more reliable model, we have to trust that if they see the need to take the foot off the accelorater to stay around 2% in the long term, then who seriously thinks they have better information. For the record Australia is a different country to NZ, and I'd love to know where the "soft:" comment comes from. In fact their last inflation out- turn was much higher than expected, and a bit of a shock to the market and economist, which has seen all talk of cut rates disappear overnight and rate hikes now being forecast for as early as Nov. (despite underperforming NZ currently in terms of GDP and alot of other forward looking economic indicators)

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Kimy - I can't see the link youre referring to, but eitherway, I'm involved directly in markets and I can assure you that in the last week that is certainly not the markets view no matter what main stream media say (who consult markets anyway). Rate cuts now ruled out by even the most bearish of economists with good track records such as Westpac's Bill Evans. And some now starting to talk of Nov as the timing for the first hike., 

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Disengenuous. NZ inflation of 1.7% doesn't include "housing inflation" running at greater than 10%. As housing price inflation moves higher and higher, the peasants have less and less to spend on the other necessities of life which make up the raw manicured inflation figure you quote, which excludes housing

It's a tautological fact that as housing inflation rises the manicured inflation figure must be lower and going down

 

The wheelman is trying to get a grip on housing inflation, which the "banks" are exposed to, and that's his concern. As stated above, if trimmed inflation is low or going down he should be concerned. They go hand in hand 

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Housing is an investmant and not a cost of CPI.  On top of that outside of some areas of Auckland, and Chch are others risign anywhere near that? Not that I am aware of.

regards

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Kimy, the 0.2% fall in the CPI was rightly or wrong deemed an aberration by both the RBNZ and the market i.e. their modelling of the leading indicators 18 months out shows that. Where the inflation rate is now is only a starting point, where it would be without rate hikes in 18 mknths time is what both the RBNZ and the market have to focus upon because theres nothing that can be done to influence that rate over the next 6 months, and certainly not on what has already happened.

 

I repeat the 2.9% inflation rate isn't seen as low in Australia, and can't be when you have a legislated 2-3% target, and can't influence anything but 12-18 month out. And if you think that wages rising faster because your inflation rate (Australia) is higher than another countries (NZ) who's is lower, you're missing the big economic picture. If that was an easy route to prosperity, why not create 5%, 10% inflation, hell why not hyperinflation and party until we die...but die we would, and the first ones to go would be our export sector when they lost their competitiveness. Already Australia is starting to lose theirs, and with it, jobs to places like NZ.

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Grant A

Some years ago Glenn Stevens explained that monetary policy and fiscal policy are opposing forces. If Government doesnt contain or restrain the forces of fiscal policy, then the reserve bank has the peverse option of doing it for the goverment using monetary policy

 

If you have been following the AU press, it's been full of the pain that's on the AU horizon for the coming budget. Medicare is being cut with the introduction of a co-payment, pensions are being tightened, house assets are to be included in the assets and means tests for elegibility for all welfare, the retirement age is to be increased to 70 and corporate welfare is to be slashed. Big, big cuts are coming.

 

And the reason for that? Glenn Stevens, Governor of the RBA, has warned the Federal Government if it doesn't rein in expenditure, he will have no alternative but to do it for them and raise rates

 

Watch this space - a lot of pain coming

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Yeah I agree iconoclast, the Aussies have some pain coming, but frankly they havent had a recession in the last 22 years, so this period of pain was always coming as it generally takes a recession or two to shake up an economy. Hopefully the Aussies can do the shake up now and get their economy more efficient again without that addtional pain of a recession - afterall its not in NZ's interests to see Australia struggle for too long. 

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Appropos the above - The John Key led government has shown no inclination to curtail the excessive flow of capital into housing, so wheelman has had to do it for him. Little choice

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True, and neither has the Aussie Govt, and that includes the RBA as well who haven't acted either

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An interesting 2 speed view.  The markets and the RB think that we'll see far higher inflation 1~2 years out, yet that seems to have been the opinion for 5~6 years.  Externally most of the rest of the world's economy looks as sick as. Oil is running at $100USD and in fact WTI is slowly inching up towards Brent at $110USD putting a huge damper on any real recovery.  So really the markets think things will get better, personally Im looking at the cripplingly high oil price, higher than comfortable unemployment, and huge debt and wondering what they are smoking.

regards

 

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Well if some of that proves to be true Steven, the RBNZ will moderate its rate hikes, indeed it could even cut the OCR. The big question is, what if you're wrong, is possible that you don't have any special knowledge that the RBNZ doesn't  ?  I haven't heard anything from you that isn't well known and debated..its all opinion which may or may not prove to be correct in the passage of time. This is the problem we all have, we can debate to death but don't have any such special knowledge, but unfortunately its the RBNZ that carries the can for poor decision  making on monetary policy, not bloggers. And history shows, when the RBNZ cocks up, as it did in 2003-07 by being too slow and timid, everyone is a critic, including many of those that criticised them for being too aggressive on the way up, despite them letting inflation get to 5%...funny how that works

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OK, so if Im wrong whats the consquence? inflation a bit higher than the 4.75%? contemplated?  

Lets just look at the track in inflation...and un-employment...1.5% and 6%, oh and wage rises? very low.

So on the upside we see inflation maybe a bit higher, on the downside we see what could be a major recession and higher un-employment, I'd suggest the impact is asymetrical.

Oh and how many ppl look at peak oil? and put it in their calcs? most seem to ignore it, yet its the downer and inevitable.  Of course these are major events that you cannot predict.

Look at oil now, $100US, and not $40US that has a big impact on the economy and its here to stay.

Sure we can critise them after, however Im critising them before. You are right of course they cannot win.

Personally I think "fighting" inflation is now done with the side effects to severe, and of course we have the LVR tool, seems to be effective in the area needed.

regards

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Kimy just learn to suck it up mate. Plenty more interest rate rises in the pipeline to make the heavily indebted (presumably like yourself) squeal, so just get used to it. But your pain is someone else's gain so just think of all the extra cash flowing to savers, who will then spend extra to support the economy.

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You got it back to front Kimy.  Savers have disposible income.  Because they arn't paying big interest bills to the banks.  

On a lifetime basis I have hugely supported the economy in the way you desire, and thats because I have saved against your advice.

 

 

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I think you're wrong Kimy, I'm one of those savers and I'm spending, spending within my means, but spending well more from what I can see of my peers who remain heavily indebted because of past poor borrowing decisions. In fact I'm likely to spend more as investment returns rise. Remember there are more savers/investors in NZ in number than borrowers, the problem is those borrowers situation get more media.

 

Rising interest rates are designed to slow spending, understand that, but if you took 2003/07 as a example it took some years to do that. But the most leveraged were the first to close up shop, it was their choice and there will be more of them this time because of the unsustainable levels that housing prices reached in recent years, but yet people still bought 

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Dont mix up "savers" with the "saved"  Generally I think you are wrong, if nothing else because over-spending encourages businesses to "expand" beyond sustainable means, employ ppl that cant be employed long term.  So lets say you are not a saver, a 'spender" there are 2 options here, live within your means or take on debt, the latter would boost the economy but only in the short term, then that "spender" has to get back to balance AND then pay down the debt AND its interest, ergo debt spending isnt a good thing IMHO.

Now if you are a "saved" and live within your means ie dont spend your saved capital, well thats neutral as you live off the interest.  Now sure you could spend the interest and the capital but sooner or later you are broke and have to live within your means.

So personally what you are advocating is a short term sugar high followed by a diet....that makes no sense IMHO.

regards

 

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"we have to trust that if they see the need to take the foot off the accelorater to stay around 2%..."    accelerator?

Of course  -  we have full trust in our leaders, they know what they are doing, they are faithfully executing their orders from a globalisation programme - which has deemed NZ to be a "High interest, Commodity-based, Currency Parking economy" which will not necessarily benefit NZ home owning mortgage=holders in NZ.

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duplicate

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OCR is not necessary as it penalises the rest of NZ for Auckland housing.
http://m.nbr.co.nz/article/ocr-hike-not-needed-penalises-rest-nz-auckla…

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The thing that truly winds me up, is that it seems as soon as a few drops do manage to trickle down to the bottom, some buggar up top turns the blasted tap off!

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Well you'd have a point if it was ALL it was going to go up and you would have a point if it didn't start happening until AFTER the bottom end was getting plenty was actually making real headway. It will affect people, an example would that cleaner who will find when people have to re-arrange their budget, she is the first to go.

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If it is so little ... why put it up?

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Its not new but its interetsing coming from someone with that background and record, and I suspect he's right. The problem with this is as always, the timing 

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why is RBNZ trying to destroy our economy?

I have to invest to compete against incoming foreign investment - why doesn't RBNZ want to NZer's business to stay in NZer's hands?

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I just don't understand how putting up interest rates helps anyone except the banks make more money. The rate is just an "Imaginary number" it was lower last week and everything was ticking along now we are paying more money for nothing in return so thats less money to spend on "Real things" like food and bills etc let alone have any left and buy shares, save anything or grow the local business. I guess I must have missed econonomics at shool but passed everything else like math and physics. I did however use the math and figure out that paying off the mortgage as fast as possible was the way to go.

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I'll ask you the same question Carlos, how does higher rates make more money for banks?  

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