By Alex Tarrant
Prime Minister John Key is playing down rising inflation, saying controlled government spending and low interest rates are helping New Zealanders hit by higher food and oil prices.
Figures to be released by Statistics New Zealand this morning are expected by economists to show CPI inflation was about 4.7% in the March quarter from a year ago, well above the Reserve Bank of New Zealand's target band of 1-3% for the medium term. Quarterly inflation to expected to be around 1.0%.
Key said the GST increase on October 1 from 12.5% to 15%, which generally increased prices 2.2%, was one factor of the high inflation rate, and which RBNZ Governor Alan Bollard would look through in terms of monetary policy.
"As you would have expected, typically when inflation rises, interest rates rise. Actually the government cut interest rates, so we looked through that," Key said on TVNZ's Breakfast programme.
"But it’s oil prices that are concerning, but they’re around the world, they’re beyond the control of governments. That is putting pressure on inflation, and of course that feeds through to every product that we buy,” he said.
'We are helping'
The government's tax cut package was helping people on lower incomes deal with higher prices, and government was taking inflationary pressures off the economy by controling its own spending, Key said.
“We can do a few things. Firstly our tax cut programme at one level does help. If you earn NZ$50,000 or less, you don’t pay tax in New Zealand if you have two children aged under 18, because of Working for Families. So maintaining that’s been very, very important," Key said.
"The second thing is now, three quarters of the country pay 17.5% or less as tax. So that’s important – let’s just try and make sure people keep what they earn," he said.
However the government could not control some things like violent fluctuation in food or petrol prices.
“But what we can do though, is we can make sure we take the pressure off the system. So, by us controlling our expenditure, then we take the pressure off the Reserve Bank Governor. In turn it’s less likely that he will increase interest rates," Key said.
"That is a big deal, because, if you go back to, let’s say when we came in [to government], the floating [interest] rate was over 10% for your mortgage. If you borrowed a couple of hundred thousand dollars on your home, the difference between that and what you’re paying today is NZ$200 a week less,” he said.
'Problem is when the RBNZ Governor has to react'
Meanwhile on RadioLive this morning Key said if the Reserve Bank Governor had to react to price rises by raising interest rates, then there was a problem.
"There are some bits of that CPI that we worry about that are concerning. And that’s around particularly petrol prices," Key said.
"But where we increased GST, the Reserve Bank Governor looked through that. And you can see that by the fact that instead of actually raising interest rates as some might predict, he actually cut interest rates recently," he said.
"So the worrying thing is when he thinks it’s putting pressure on the overall economy. That’s things like food and fuel prices."
"Again, [there are] certain bits that I don’t worry too much about: if you raise prices of cigarettes, it has an impact on CPI, but we did that deliberately because we want to stop people smoking if we can.”
You also had to take the 2.2% price increase due to the GST hike off the headline CPI figure, Key said.
“When we came into office literally in November 2008 the number was 5.1%, and no one had been compensated for that," he said.
'A man's word is his word'
Meanwhile, Key was asked on Breakfast why the government was not considering putting interest back on student loans or raising the retirement age in the face of borrowing NZ$300 million a week to pay for its budget spending.
"Firstly when you have a look at the budget, you’ll see that we’re getting on top of that debt profile, and I think we did the right thing borrowing that level. Sometimes it was beyond our control, like the two earthquakes we’ve had," Key said.
"But equally if we hadn’t done that, if you roll back to 2009, what would have been the situation? Well it would have been much higher levels of unemployment, and the recession would have been felt even deeper," he said.
“Even the Retirement Commissioner doesn’t think we need to raise the pension age today – she argues it’s in ten year’s time.”
Key has said he would resign as Prime Minister if the pension age was raised under his tenure, something he did not regret.
"And I think your word’s got to stand for something, either you say it and you mean it or you don’t. I think it’s important to have clarity and people need to understand what’s happening," Key said.
"Personally I worry more about the increase in healthcare and the costs that that’s likely to present to the governments of the day than actually superannuation,” he said.
'Trim the edges'
There was alot the government could do at the edges that made a big difference in the student loan area over time.
“[Tertiary Education Minister] Stephen Joyce has already implemented some of those changes, this is going to be another round in the budget.”
Joyce said on Sunday the government was looking at a range of measures to claw back overdue loans, including more use of debt collection agencies overseas. Former New Zealand students now overseas held about 15% of total student loan debt, but owed about 55% of overdue debt, Joyce said on TV1's Q&A (see the transcript here).
Joyce also indicated government was looking at reducing or cancelling the three-year repayment holiday available to people overseas.
'Not good economic policy'
Key said he argued against interest-free student loans during the last election campaign as it was not good economic policy.
“And actually I was right. I mean, it cost a lot more than what [former Finance Minister] Michael Cullen said.”
Asked then why he would not roll the policy back, Key replied: “Bluntly 580,000 people have it [a student loan]. If you go around, turn around and say, ‘look interest is back on your student loan,’ it will have quite a big impact on how long it takes them to repay.
So I acknowledge there’s a trade-off here between extending, considerably, the length of time it takes to repay a loan, visa vie the fact that, what I don’t like about it is the message it sends to young people is, ‘go out there and borrow’.
What happens is, when you’re 19 or 20, you’re a bit bulletproof. You think, ‘borrowing some money, ah that’s not too big a deal, I’ll pay it back when I get a job’.
Then they all of a sudden get a job and they look down the barrel of a twenty, thirty, forty, fifty thousand dollar loan, maybe more and then all of a sudden realise that’s a big burden to carry.
So I don’t like that element of things but there’s very little I can do about that.”
(Updated with Radio Live comments, comments on retirement age, student loans, CPI chart, 'We are helping' section.)
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27 Comments
"Actually the government cut interest rates".......so much for the independence of the RBNZ...Bollard did what he was told to do!......what a bloody farce.
".. and government was taking inflationary pressures off the economy by controling its own spending"......which means what?.....nothing....it's mindless waffle...'Sir Humphrey' speak....
So there you are savers...Key decided to tell Bollard to cut the ocr to 2.5% and thereby slash the pisspoor returns you were getting...on which you are paying tax and the best bit he never mentioned.....the Kiwi$ is being debased by 5% this year alone....put that with the 12.5% down since 07 and aren't you doing well...your savings have only lost 17.5% .....
So Wolly (& others), what kind of investments do you suggest, since saving accounts don't seem the way to go? We are not interested in property and we would need to borrow to buy a 2nd home anyway which we do not want to do (no desire to pay interest on anything).
The share market is probably the most appealing option to us (not the NZX though) but with the markets apparently manipulated, it kinda feel like placing a bet , ie not that much better than buying a lotto ticket .
The other option would be to just spend everything to earn but we do want to save, mostly for our kids and it'd be nice if it could buy them more than a block of chocolate in 20-30 years' time!
Thing is Elley, at the mo the markets are floating on Bernanke's printing bubble and praying Beijing doesn't spit the dummy. You would be wise to stay oncall with govt guarantee at present or maybe 3 month...it runs out in Oct. Wait out the madness because the downturn when it comes will be deep. That's when you will see a repeat of the 08 slash and sell across the boards...when the PEs get down to 5....that's when you buy the quality stuff...a tough call to make. If it's too tough look to buy the Trustpowers and AiA etc. At least there you get imputations and growth after the collapse.
Realise the swine manipulating the bubbles know they can make as much by causing a drop...that's the real insider trading even the useless SEC lacks the guts to go near. The Piigs fiasco will bugger the Euro...the Yanks are broke and owe trillions...the Chinese are chasing the property ponzi game....and it will all come crashing down.
How are low interest rates helping Kiwis? Cost of living going through the roof, fuel, food, insurance etc etc. Low interset rates are fuelling another property spike, making owning a home now totally unaffordable for even your better off Kiwi. Rents on the rise in Auckland making it even tougher... sigh! Things not looking good for most of our fellow citizens!
Nicely played Mr Key...
The obvious one is low interest rates keeps the mortgage payments down for those having homes already.
CPI and core inflation are different... Even with CPI somethings are up, somethings are down.....wages are not up so if ppl dont have more money they have to buy less of something else, the NET is core inflation is 2% and might drop further...CPI is also volitile....wheat was low output this year....its "probably" a one off event....though with AGW its hard to say we wont see other records inside this decade...ie a re-run of the bad harvest in Russia....
regards
Key refuses to acknowledge the fact that this economy will not begin to make any real progress until his govt has finished directing the RBNZ to debase the Kiwi$ to wash away the debts that are in Kiwi$....sooner or later the overseas savers will wake up to being screwed...they will demand an extra % to put right that loss.
Meanwhile the message to savers here is clear...invest offshore and avoid taxable gains.
It's cumulative Stuffed....it is what Key said the govt was happy with 2 years ago...property prices might remain at the bloated levels to contain the mortgagee rout and protect the bank balance sheets, while after ten years you would see the Kiwi$ worth just 60 to 70% of what it had been...so property would have fallen by 30%...!
This looks great but it is theft from savers pure and simple...it also leads to those who lend to govt demanding a % to cover the loss when govt wants to refi the loans.
The only debts not washed away are in foreign paper...but using the fx market rise in the kiwi$, the refi process can provide some cover. ie a loan taken out in Yen is repaid when the Yen falls.
The $100ooo of your savings in 2000 are now worth 30 to 40% less in real terms...by 2031 they won't buy you a chocolate fish !
Gosh I didn't know that Westminster...shall we tell the people who are saving in a bank to have enough to get a mortgage that they should tell the bank to "shove it" and follow your advice?...no I thought not. Now go and sign up for econ 101 cos you need the learning boy.
Yeh a basic banking premise, but one that happens to be wrong.
Even during the times of the Gold Standard, the need for depositors was not as signifciant as what you'd assume. Banks would take deposits in Gold and pyramid credit which they would issue to borrowers on top of it.
"But now suppose that law enforcement is lax and the bank sees that it can make money easily by engaging in fraud, i.e., by lending some of the depositors’ gold (or, rather, issuing pseudo warehouse receipts for nonexistent gold and lending them) to people who wish to borrow it...the warehouse receipts still function as money-substitutes on the market. And we see that new money has been created by the bank out of thin air, as if by magic. This process of money creation has also been called the “monetization of debt,” an apt term since it describes the only instance where a liability can be transformed into money—the supreme asset." Man Economy and State, Murray Rothbard
Now depositors are incidental to the functioning of the banking system and their role appears to be a mere cultural holdover to the days of the Gold Standard. Credit is no longer pyramided atop of deposits of gold, but ontop of capital, which are merely different forms of debt instruments.
“Following a number of similar measures adopted earlier in the year, we are taking these steps to further enhance system liquidity and ease some of the current pressures on corporate sector funding,” Mr Spencer said.
The new measures, most of which will take effect from 17 December, include the following:
- Extension of the range of securities eligible for acceptance in the Reserve Bank’s domestic liquidity operations to include:"
http://www.rbnz.govt.nz/finmarkets/liquiditymanagement/3316334.html
Really?
A run on a bank by the depositers would suggest otherwise...
I like Rothbard as well especially with context...lol...
Mises says...
Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.
@Stuffed, well that is the plan it seems.
I have said for a long time now that I don't believe interest rates will rise (substantially) over the next few years as the govt tries to inflate the debt away. Problem is that we are in uncharted territory here, eventually there will be a price to pay. The longer this goes on the higher the price we will pay.
But for now it keeps the politicians and their corporate mates well fed at the trough. Apparently 57% of Kiwi's think National is doing a good job. Need I say more....
Interest rates won't rise while inflation is within the 1-3% target which at the moment it is. And raising interest rates will not help contain prices that are set internationally like petrol and to an extent food - so why take a whole lot of money out of peoples pocket through high interest rates for no real gain. Yeah it sucks for savers, but the reality is that most Kiwis do not have savings...
More Kiwis have savings than you realise. A high proportion of homes in NZ are owned without a mortgage. Most of those people have savings.
In the end it wont be the RBNZ decision on interest rates. When the overseas rates rise and our credit rating is dropped NZ and NZ banks will have no choice but to pay the high interest rates on the debt they have.
This low interest rate enviroment in NZ will be short lived.
Its all bullshit.
We have a situation where inflation is climbing. The traditional fix would be to rise interest rates, that would put heat on the dollar and we know what comes next .
The G7 moved after the Japanese quake to stop the Yen appreciating because the banks had too much riding on the carry trade and the losses would have been huge.
The carry trade boys will soon punt on our $, but as they already make a killing more of the stautus quo would be preferrable to volitility.
I talked to an apple grower at the weekend, the strong $ has been fatal, he is ripping out 120 acres early in May. The government should have thought of that before it started borrowing heavily this month.
This is just another thumb in the dyke and how many have we got? How long till we start a massive round of Government cost cutting?
sorry no link to this from Money morning
FX Peanuts
Each day, around USD$4 trillion is traded on foreign exchange markets. So even if the G7 central bankers sold the USD$25 billion worth of Yen on one day, it would be no more than 0.625% of the daily foreign exchange turnover.
That's tiny.
So, why should such a small amount have such a huge influence?
I mean, how can a trade that makes up 0.625% of daily turnover cause the value of the Aussie dollar to rise nearly 18% in just four weeks?
And think about it this way. Over that time, at an average USD$4 trillion of foreign exchange traded each day, that works out at nearly USD$100 trillion.
So, as a percentage of that, the G7 intervention was just 0.025% of the turnover during that period.
It seems ridiculous that such a small number could have such a huge impact.
Yet, the intervention gives you a perfect example of the manipulative nature of central banks.
Central banks act like the Pied Piper. They play a few notes on a whistle and everyone falls in line. Big investors figure if they're following the Pied Piper, everyone else will too.
So what do they do? That's right, they all pile in on the same trade.
Punters took the view that central bankers were putting a cap on the Yen. That it wouldn't be allowed to appreciate any further against other currencies.
You've probably heard of the "Greenspan Put". That was the idea that former US Federal Reserve chairman, Alan Greenspan wouldn't allow stock markets to fall.
That in the event of any adverse economic event, the Fed would intervene to lower interest rates. And lower interest rates should mean more money flowing out of fixed interest investments and into riskier stock investments.
The term "put" is a reference to the options market where buying a put option allows you to limit your losses, or profit from falling prices.
The "Tokyo Call"
In the case of the G7 currency intervention, we could call it the "Tokyo Call".
G7 central bankers have in effect bought a call option to protect all those punters who are short the Japanese Yen as part of the Carry Trade.
In other words, the "Tokyo Call" was another in a lengthening line of banking and fund manager bailouts.
If you're not familiar with the Carry Trade, let me explain…
It's where big investors borrow money in a low interest rate economy and then take that money to invest in a higher interest rate economy.
The Carry Trade has been going on for years.
One of the major beneficiaries has been - and continues to be - the Australian market.
As interest rates have historically been higher in Australia than Japan, it gives big punters the easy trade of borrowing Yen, selling it, buying Aussie dollars and then investing in Aussie assets - bonds, shares, etc.
If you're borrowing money at 0.1% and investing it at 5%, then all else being equal you'll make a 4.9% return. The caveat is that the exchange rate needs to be stable, or for the currency you're borrowing (Yen) not to rise in value.
But it's not just Australia that has benefited. Any economy with an interest rate higher than Japan's has benefited from the Carry Trade - Brazil, Argentina, Europe, United States, UK…
There aren't many economies with lower rates than Japan.
And because the carry trade has gone on for so long, there is a huge exposure to it.
In fact, the carry trade is one of the biggest risks hanging over the global economy. As I say, in order for the trade to work, the Yen must not increase in value. The Yen must remain low.
If the value of the Yen goes up it will cause massive losses to banks and investment firms that have borrowed in Yen to buy investments in other currencies.
The Carry Trade Bubble
For instance, if a firm borrows one trillion Yen at 100 Yen to the dollar (we're just using made-up numbers here), that equates to a $10 billion exposure.
$10 billion that can be invested in Australian investments.
Now, assuming the value of the investments don't change, but the value of the Yen strengthens to 90 Yen to the dollar, the same $10 billion will only buy 900 billion Yen when the loan is repaid.
In other words, the investment firm would take a 100 billion Yen loss on the trade, or about $1 billion.
Now multiply that number many, many times and you'll come to a figure that gives you the total financial exposure to the Carry Trade. But just how big is the carry trade? And what does it mean for your investments?
There's probably no accurate way of determining the actual size of the carry trade. But according to a 2007 article in The Economist:
"Tim Lee, of Pi Economics, reckons as much as $1 trillion may be staked on the yen carry trade."
Personally - with no way of verifying this - we'd wager the real exposure is much bigger.
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