By Roger J Kerr
The economic forecasting houses calling for the RBNZ to cut the OCR are either examining an entirely different economy to what I observe, or they truly believe that New Zealand monetary policy management should blindly follow what the Aussies do.
Never let the facts get in the way of a good headline is one response.
However, the local moneymarkets are also starting to price-in an OCR cut by July as well.
They also seem to be misreading the lie of the economic landscape.
A short history lesson reveals that the Reserve Bank of Australia increased their official interest rates from 2.50% to 4.75% in 2010 after they avoided an economic recession from the GFC and thought they had looming inflationary pressures. The RBNZ left our OCR unchanged through that period as events like the Christchurch earthquake and NZD strength delayed the removal of the emergency March 2009 2.50% OCR levels.
The consequence of the increase in Australian interest rates 18 months ago was to attract global investment funds into the only growing economy in the world that also offered higher yield returns. The net result was a rapidly appreciating AUD currency value that has decimated their non-mining manufacturing sector over the last 12 months.
The RBA have belatedly recognised their monetary policy error and are now hurriedly dropping their interest rates.
The New Zealand situation is completely different with the pickup in the economy due to high agricultural commodity prices occurring in 2011, coming a year after the boom in mining commodity prices that boosted Australia in 2010.
The economists and moneymarkets advocating an OCR decrease either think the NZ economy is headed into recession or that annual inflation is headed to below 1.00%.
Neither seem very likely to me.
The NZ dollar over the last few days has broken below key support levels and appears headed lower.
There are two automatic consequences of the depreciating currency value that render the OCR cut arguments as futile and misplaced, and they are:
- Exporter’s income and profits which were being hurt by the falling commodity prices and sticky NZ dollar above 0.8000, are now much relieved with the falling dollar and thus +3% GDP growth this year still appears more likely than not.
- Prices on imported consumer goods (TV’s, computers, furniture, clothing and sports gear) which have been reducing for 12 months and thus disguising other price increases in the economy, will no longer be falling. Based on a TWI exchange rate value at 70 for the rest of 2012, 6% below its recent average, any inflation forecast has to be well above 2% for the next 12 months. Add on rising prices for electricity, rents, construction, insurance, beer and rates from the non-traded goods sector and it is a recipe for an annual CPI nearer 3%.
The RBNZ would be making a monumental monetary boo-boo if they were to follow the calls for an OCR cut at this time.
Lower mortgage interest rates would also add fuel to the residential property market which is already hotting-up due to a lack of supply of properties in Auckland and Christchurch.
Cutting interest rates at this time would be a policy mistake that would not be a good look for Governor Bollard’s last few months in office.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
35 Comments
While you maybe dreaming of 20% for no effort, in UK in the early 90s we had some high interest rates and ppl were losing their homes....
So yeah sure get 20% for nothing, v work any and all hours you can to keep your home....big difference me thinks......
regards
Roger - have a read of this:
It's another reason (or several) that RB can cut and still have confidence they can keep CPI in band, even though they would not use these tools to actively support monetary policy execution, they will be using them to push back against housing inflation, ie. the prime sourse of non-tradeables inflation. Plus, maybe Hugh et al will get some movement on the land/housing supply driver.
Cut away RBNZ, cut away.
Cheers, Les.
one of the key reasons the low OCR has made little difference to the economy is that the planning system isn't allowing it to work its magic.
With RMA and District Plan reform seemingly dead and buried, the majority of zoning does not allow any development that is even remotely approaching feasibility.
Brisbane is reforming its planning system in acknowledgement of this. Their planning rules were already relatively liberal, they are going to get even more liberal because developers can't get enough density to get the profit margins (20% plus) the banks are demanding, and this means Brisbane's intensification goals are falling behind. They are finding that standard 700-800 square metre sites need to allow for 4-5 units rather than 2-3 units, to stack up
National came to power promising planning reform and to address housing affordability, not to mention to turn outflow to Australia around. On all counts they have failed miserably
Until planning reform occurs neither the construction industry or housing affordability will be adequately addressed
Matt you're on the money
What's more, you can extrapolate that to the entire economy - we're living in a nation where nothing much can happen because the RMA and the bureaucrats running it kill business activity
National are just Labour Light - time they realised there's more to life than being popular.
RMA is there to protect NZ's habitate for ppl and wildlife....We choose to not turn NZ into a cesspit unlike Americans and the USA.....for the profit in money terms of a few.
Popular as in most ppl want the RMA and dont want a cesspit.....yeah sure.....popular, so lets forget democracy and do what extremists such as yoursef say is right......
What is killing business activity is,
a) debt......
b) expensive energy......
c) expensive raw materials....
We dont live on an infinite flat earth........so b and c are not surprising.........
regards
Steven - the RMA protecting ppl and wildlife habitats is a myth..
The RMA is abused at every level by many people oppose applicants who are trying to build and develop business and by those who administer the RMA. It is costly, inefficient, ineffective and since it's inception NZ water quality appears to have declined significantly.
The RMA is being used to place unreasonable conditions on quality type business activities who have no/to minimal environmental impacts. The dust caused by traffic on public gravel roads has to be mitigated by the holder of the consents and this will frequently be part of their conditions. Rural land needs a RMA consents to operate anything other than a farming operation. If you wanted to run a tourist business such as a cafe, road side stall, wedding or function centre, other tourist attraction on your farm you will need consents to these environmentally harmless activities. We are not talking about business that has effluent running into a waterway or a chimney stack billowing harmful toxins into the air which would be a habitat that needs protecting. It can cost thousands of dollars to go through the RMA process and the applicant has to bare all the costs. Those who are opposed to the application often waste considerable time and resources that the applicant for the consents has to pay and endure sitting for hours listening to the opposers of the consents who are opposing on personal grounds rather than whether the activity will pose an environemtal problem/risk or not.
A business recently had to discuss with its local Council on whether 2 vehicle movements down a road at midnight would have less environmental impact than at 1.30am in the morning. This is absolute rubbish and the business has had to apply for a variation to their consents costing several thousand to get this issue resolved.
The more legislation, regulation and rules NZ has the more incompetence we have. Most bureaucrats have no practical experience and before anyone can get any Govt type job they should have to work from the ground up in private enterprise so they can obtain the necessary skill set that Govt jobs require. Government costs and bureaucracy is killing business and if you don't believe me look at all the compliance that business has. Each sector/industry has enormous compliance issues specific to it which impedes productivity.
just a few weeks ago roger was sayign fix (for the umptenth time since GFC) and term rates now 0.50% lower ..is this unbiased commentary or just rying to justify to clients why they all have fixed debt under water ..........????
australia is our biggest trading partner ..dairy prices off 37% from peak and no full time job growth or any wage increases ..seems like an OCR cut (while unlikely) is not completely silly !!
The Queen asked why most economists had missed the GFC.....Roger is still in the missed the boat camp...but he isnt alone.....JKey thinks with the stimulaltion we have we should be growing at 6%.....and we are growing at 1%....so only a half wit, a bank economist or a dogmatic pollie would stick to a obviously broken paradigm and economic model.....but dont hold your breadth for Labour.
Whats really ludicrious is the biggest risk is deflation and depression, yet I see nothing from Roger on managing that risk....even dismissing it as "impossible" would be a start....
OCR, I find it hard to fathom why the OCR is even this high myself....
regards
"would"? No idea, I dont think she presumes to know (a particular school of) economics or give an opinion. That's why she has a Government, a PM and such Royal(?) societies as these who offer "best" advice....and hence such a comment by her was so damning....but subtle....
I dont know if any school of economics has it correct, but what I do believe is that all the schools have really been corrupted by Pollies wanting they results they want based on just wanting it to be so....So Keynes was a failure in the 70s but that was due to the Pollies of the day, I think. Here we are again at an even bigger failure but again its voodoo economics dressed up....
For a zero trap problem which we face today its classic Keynes, but Im not so sure Foss is that different ie both see a depression....except she see's we have a terminal problem of no more cheap (fossil) energy, something Keynes didnt have to contend with in 1936 for his work/solution. The interesting work for me is Minsky/Steve Keen, Ive not see anything else that models so well and predicted the GFC....and what looks like the Greater Depresion thats coming....
regards
just a few weeks ago roger was sayign fix (for the umptenth time since GFC) and term rates now 0.50% lower ..is this unbiased commentary or just rying to justify to clients why they all have fixed debt under water ..........????
australia is our biggest trading partner ..dairy prices off 37% from peak and no full time job growth or any wage increases ..seems like an OCR cut (while unlikely) is not completely silly !!
I'm sorry but Roger Kerr personifies what has (and is) been wrong with this country for the last 30 years. Old thinking that the only mechanism available to control our economy is interest rates dictated by the RB and based on the inflation rate. We all know the later is a joke figure as real inflation runs at least at 7 -10 in this monopoly/duopoly based minor economy.
The effect of high interest rates is this - increases inflation as businesses pass on borrowing costs to comsumers, reduces our exports as high interest means high $. Stalls the economy as people pay needless high interest rates rather than save or spend.Stalls investment in all businesses as they become less viable and profitable due to interest costs. I could go on.
Roger goes on to blame our high inflation on our "passion" for property investment. What a load of rubbish. New Zealand has a shortage of housing, itself inflationary. If investors don't own houses and finance them where will people live? If investors don't carry the debt related to this who will?
I could go on but it really is time to put Roger and his ilk out to pasture before interest rates are 20% again.
Its ignorance is bliss in your case eh? shove your head deeper into the sand i suggest....
To start with, I didnt and dont say oil will run out, but you inability to think seems to be concluding I do.
I said,
1) we cant get out any more crude oil per day.
2) fact we peaked in 2006
3) At some stage in the next 5 years the output will start to decline
4) When that happens our lifestyle will be bye bye.
5) What's left will be un-affordable by many such as myself.....and / or rationed.
You translate this into we are all going to die....
Oh dear....
Now in terms of AGW in 150 years or so yes our desendants will indeed all die.....at the rate we are adding CO2 this is as close to a fact as we can get unless we choose to stop.
regards
Oh very true, but then in what logic does popular = right work?
cant see any logic in there...but then the many optimists I meet are not realists. There is a huge difference between being blindly optimistic past the point of stupidity and being hopeful but planning for the not so good....
regards
What you say, Ivan, is completely correct, although in Steven’s case he wasn't in New Zealand 30 years ago, he wasn’t even here 20 years ago. He's a foreign import no doubt attracted to NZ because it’s full of the very types about which you complain. Birds of a feather I guess. What I'd like to know is who in the immigration dept was responsible for issuing him with a visa, because if he is any sign of the sort of quality of migrant we are attracting to this country then we have a very serious problem on our hands.
Apart from the fact that I agree on RK being best left alone........I dont agree.....
If you look at core inflation its really 2% ish, no where near 7%, even CPI isnt that..........sure vendors would like to ask more....asking and getting when ppl are earning no more are two different things. In my case lets see a no % pay increase, so if any vendor wants a 10% increase my choice is pay it and not buy something(s) else, buy something else(s) instead or not buy......the NET end result is not inflationary.....and in fact its more like deflatioanry because the ones able to charge 10% more are not employing, making or doing anything more, the ones I dont buy off make less or charge less for it and let go staff....
Also the past 30 years is but an interesting foot note, it bears little obvious relation to the next 30 years......
20% not until we have seen a huge clearance of debt.....
I'd suggest Steve Keen is a good read.
regards
Who says building and construction will lead to economic recovery? Sure in the medium term it will pump in some much needed cash into the CHCH region but that is a one off. Auckland still has plenty of unoccupied commercial space and the housing space is still very quiet.
Net foreign investment will get NZ moving. Ireland had it largely correct the just forgot to control a rampant bank sector fueling a massive property bubble.
The elite control the issuance of money. Its all interconnected
If you buy a barrel of oil it might cost you say $100, if you conjure up some money out of thin air then buy that barrel, did that oil really cost you anything?
The elite will stop at nothing to retain the integrity of the $ system for as long as they can. They wage wars to defend it, assassinating one person is but a minute part of what they are capable of. So if a President signed into a law the provision for allowing another competing currency you better believe he will get the chop.
Google Kennedy's Executive Order 11110, and wake up.
AFM - possibly, but only in passing. Peak supply of global energy, however, is 100% connected to the future ability to pay.
Why it is that so many don't 'get' that, I'm darned if I know.
Debt is the expectation that the future (not the past, so relying on past trends to predict is horseshit) will underwrite. That it will cough up enough goods/services for folk to trade, to 'pay off' what they owe. The expectation of interest, is that the future will increase the supply of goods/services.
100% linked - without the energy you don't service the interest. Welcome to the far side of the Gaussian. Slow going, educating those who don't wand to know, eh?
Personally I have come to the conclusion that they dont get it because they dont want to look....not sure if its a mental shutter coming down to stop a messy bowel movement or what. Lets face it their lives are about to be ruined in some cases and their dreams dashed.......but its clearly there from bright ppl to not very bright...not even a rational why not...just NO!!!!!
Hence I think its best to leave them burn and learn.....skin is too thick for anything else to get through....
Maybe, just maybe we can warn those who are thinking of taking on [25 years of mortgage] debt and are rational about things.....
regards
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