By Alex Tarrant
The Reserve Bank may delay hiking the Official Cash Rate until later than March 2013 after weaker-than-expected inflation figures were released this morning, economists say.
Statistics New Zealand said the Consumers Price Index (CPI), a measure of general price levels in the economy, rose 1.0% from the June 2011 quarter to the June 2012 quarter, following a 0.3% rise in the the CPI in the June 2012 quarter from March. That meant annual inflation was right at the bottom end of the central bank's target band.
The latest figures mean annual inflation is now its lowest since a 0.5% rise in the year to the December 1999 quarter. Excluding a 13% rise in tobacco prices over the year – reflecting an excise tax hike – the CPI would have risen 0.6% annually, Stats NZ said.
Economists polled by Reuters gave median expectations of 0.5% quarterly, and 1.1% annual, rises in the CPI.
Lower-than-expected housing-related inflation figures in the June quarter meant Westpac would review its current pick, for rate hikes to start in March 2013, with an eye to a later start, chief economist Dominick Stephens and senior economist Michael Gordon said. They doubted the Reserve Bank would seriously consider cutting the OCR from its current record low of 2.5%.
ASB economists said a contained inflation outlook added to the case for little urgency for the Reserve Bank to raise the OCR, and they expected the RBNZ would keep the OCR on hold "until at least March 2013."
JP Morgan economist Ben Jarman said it continued to forecast the RBNZ to begin raising rates with a 25bp hike in March 2013, "but given the trajectory of the inflation data, the risks now are skewed to a later move."
The Reserve Bank is mandated to keep medium-term annual CPI inflation within a 1% to 3% target band. Its main tool for doing this is by setting the Official Cash Rate – a base rate for interest rates in New Zealand. The OCR is most closely correlated to short-term interest rates like variable (floating) and short-term fixed mortgage rates.
Before today’s figures, bank economists were picking the Reserve Bank would leave the OCR on hold until March 2013 due to a bumpy local recovery and a volatile global economy. Financial markets were pricing in a 13% chance of a 25 basis point cut basis points of cuts at the Reserve Bank’s next OCR decision on July 26, and that the OCR would be 17 basis points lower in a year’s time.
Electricity prices hit new peak
The 0.3% quarterly rise in the CPI followed a 0.5% rise in the March quarter and a 0.3% fall in the December 2011 quarter, Stats NZ said.
The key individual upward contribution to the CPI during the quarter was electricity prices (up 4.5%), while vegetable prices were up 11%, largely influenced by a higher-than-usual seasonal rise for tomatoes (up 98.0%).
The main individual downward contribution was lower prices for telecommunication services (down 2.5%). This reflected increased data caps for broadband plans and better-value cellphone services. Fresh milk (down 4.6%) and apple (down 19%) prices also fell.
“Electricity prices rose 4.5% in the June quarter. Prices had fallen a total of 0.7% over the previous three quarters, due to customers switching suppliers and bigger prompt-payment discounts. Electricity prices are now 3.7% higher than their previous peak in the June 2011 quarter,” Stats NZ prices manager Chris Pike said.
Cost of new Canterbury house builds up
Of the broader CPI groups, the household and household utilities group rose 1.0% during the June 2012 quarter, following rises of 0.7% in the March quarter and 0.3% in the December 2011 quarter.
As well as the 4.5% jump in electricity prices, higher rentals for housing (up 0.5%) also made a major contribution to the group’s rise, Stats NZ said.
“This was influenced by rises in Auckland and some areas of the South Island outside Canterbury,” Stats NZ said.
“Prices for the purchase of new housing [new residential builds] (up 0.9%) also rose. Rises were highest in the Canterbury region and in the rest of the South Island.”
Annual movement held up by ciggie taxes
The 1.0% annual rise in the CPI followed increases of 1.6% in the year to the March 2012 quarter and 1.8% in the year to the December 2011 quarter.
Stats NZ said the main upward group contributions came from:
- Housing and household utilities (up 2.7%)
- Alcoholic beverages and tobacco (up 6.2%)
- Miscellaneous goods and services (up 3.4%)
The communication group (down 9.5%) and the recreation and culture group (down 3.2%) made the main downward group contributions, Stats NZ said.
Inside those groups the main individual upward contributions came from:
- Cigarettes and tobacco (up 13%, reflecting higher excise duty)
- Rentals for housing (up 2.3%)
- Electricity (up 3.7%)
- Purchase of new housing (up 2.8%)
- Second-hand cars (up 5.3%)
- Local authority rates and payments (up 4.6%)
- Beer (up 4.9%)
Without the rise in cigarette prices, the CPI would have risen 0.6% annually, Stats NZ said.
The main individual downward contributions came from lower prices for telecommunication services (down 9.1%), audio-visual equipment (down 19%), international air fares (down 5.3%), and vegetables (down 5.1%), Stats NZ said.
Tradables vs non-tradables
In the June 2012 quarter, the tradable component of the CPI rose 0.1% and the non-tradable component rose 0.5%, Stats NZ said.
The tradable component measures the price levels of goods and services that are imported or in competition with foreign goods, either in domestic or foreign markets. Movements in the tradeables component demonstrate how international price movements and exchange rates are affecting consumer prices. The non-tradable series contains goods and services that do not face foreign competition. It shows how domestic demand and supply conditions are affecting consumer prices.
"The tradable component was influenced by seasonally higher prices for vegetables. International air fares, package holidays, and petrol prices also rose. The main individual downward contribution to the tradable component came from lower dairy product prices. Fruit and audio-visual equipment prices also fell," Stats NZ said.
"The rise in the non-tradable component was mainly influenced by increased electricity prices. Beer, rentals for housing, and purchase of housing prices also rose. The main individual downward contribution to the non-tradable component came from lower prices for telecommunication services," it said.
"For the year to the June 2012 quarter, the tradable component decreased 1.1 percent, reflecting price falls for audio-visual equipment and vegetables. This is the largest annual decrease in tradables since a 2.3 percent fall in the year to the March 2004 quarter. Prices for the non-tradables component increased 2.4 percent, reflecting price rises for cigarettes and tobacco, rentals for housing, and electricity."
The CPI measures the rate of price change of goods and services purchased by New Zealand households. Statistics New Zealand visits 3,000 shops across New Zealand to collect prices for the CPI and check product sizes and features.
Reaction
Westpac:
June quarter CPI rose 0.3% in the June quarter, taking annual inflation to a decade-low of 1.0%. This was weaker than markets or the Reserve Bank expected. Given that the main surprise was a lack of housing-related inflation, this data is an argument for more delay before the RBNZ considers increasing the OCR.
As expected, the high exchange rate and stagnant petrol prices contributed to limited tradables inflation. Tradables prices have fallen 1.1% over the past year.
The key factor we were watching ahead of this CPI release was housing-related inflation. Last quarter, construction-related and housing-related price rises were quite strong, raising warning bells about the possible inflationary impact of the Canterbury rebuild and housing market recovery. This quarter's data assuaged those concerns. Rents rose only 0.5%, after a 0.9% increase last quarter. Property maintenance prices, which includes handymen's charges, fell 0.4%, partially unwinding the worrying 1.2% spike from last quarter. That's not to say housing-related inflation is completely absent - the "home ownership" category, which includes the cost of building new houses, rose another 0.9% to be up almost 3% on a year ago. It's just that housing-related increases were less than expected.
For now, the data backs the RBNZ's view that the Canterbury rebuild and housing market resurgence will not generate inflation. Given the low level of headline inflation, we will review our OCR forecast with an eye to a later start date for hikes. Our current forecast is for a series of OCR hikes beginning in March 2013. That said, we doubt that the RBNZ is seriously considering reducing the OCR. Although inflation is currently low, the lack of exchange rate appreciation this year and accelerating economic growth are strong indications that inflation will rise to some extent over the next couple of years. It is still too early to definitively judge how much inflation the Canterbury rebuild will eventually provoke.
Market reaction
The two-year swap rate fell 4 basis points and the NZD fell about 15 pips.
ASB
The 0.3% increase in the CPI over the June quarter was below our and market expectations. From our perspective, the weaker than expected inflation result was driven by weak tradable inflation, as subdued household demand continued to put downward pressure on the price of imported household goods. While strength in the NZ dollar had given retailers scope to discount, the widespread price declines across appliances, cars and electronics suggest the extent of discounting was greater than this over Q2. Weak household demand and the high NZ dollar have seen tradable inflation fall 1.1% for the year to June.
Non-tradable inflation increased a modest 0.5% over Q2, in line with our expectations. As expected, the increase was largely driven by a 1.0% increase in the housing and household utilities group. This reflected higher electricity prices over the quarter. Added to that are signs of a pick-up in housing-related costs, with rents rising 0.5% and construction costs rising 0.9%. StatsNZ noted the increase in rents was concentrated inAuckland and the South Island excluding Canterbury, while the increase in construction costs was concentrated in the South Island. Recent housing market data had pointed to housing supply constraints inAuckland and Canterbury, and this has flowed through to relatively larger increases in housing-related costs inAuckland and the South Island.
Recent business surveys point to emerging capacity pressures in the building sector in Canterbury as the rebuilding got underway, and we expect a further boost to construction cost inflation as rebuilding ramps up later this year.
Communications prices dropped a larger than expected 2.5%, reflecting more generous data caps for broadband plans and better-value cellphone services. There has been substantial declines in communication prices over the past year.
The subdued inflation environment is also reflected in core measures of inflation, with the annual increase in the trimmed mean and weighted median all below the mid-point of the RBNZ’s target band of 2%.
Implications
The smaller than expected increase in consumer prices over the June quarter reflects the subdued nature of household demand, which is continuing to put downward pressure on the price of imported household items such as electronics and appliances. While there are signs of a household recovery taking place, this is very gradual and retailers’ margins remain squeezed. This is in line with recent business surveys pointing to a decline in retailers’ pricing intentions.
The pick-up in housing related costs is a key development to watch over the coming year. There are signs of housing supply constraints in Auckland and Canterbury, and this looks to be flowing through to rent increases. Meanwhile, rebuilding activity has seen capacity in the building sector in Canterbury diminish, which in turn is putting upward pressure on construction costs. We expect that as rebuilding activity gathers momentum later this year this will underpin an acceleration in construction cost inflation. The degree to which this flows through to wider inflation pressures in the rest of NZ will be a key determinant of how long inflation pressures in the NZ economy remain contained.
For now though, the RBNZ will be very comfortable with the current inflation environment. Pricing intentions and inflation expectations are continuing to ease, and annual inflation is now at the bottom of the RBNZ’s target band. We expect annual inflation will track around the mid-point of the RBNZ’s target band over the coming year. With uncertainty over the Eurozone debt crisis continuing to dominate the RBNZ’s outlook, the contained inflation outlook adds to the case for little urgency for the RBNZ to raise the OCR. We expect the RBNZ will keep the OCR on hold until at least March 2013.
JP Morgan
New Zealand today posted a fourth consecutive CPI report showing inflation annualizing below 2%. Consumer prices rose a meager 0.3%q/q in 2Q12, and 1.0%oya, which represents the smallest annual rise since 1999, and sees the RBNZ flirting with a downside breach of the target band. As the downward impulse from the elevated currency fades, the relatively stronger trend in non-tradables prices will lift inflation back to more normal levels, but the breadth of the softness in today’s report bears witness to the extent of accumulated slack in the economy. Outside of persistent stickiness in household utilities and rents, the price data therefore is giving the RBNZ the latitude to tread softly in its normalization path, even with the turn in the housing market and construction activity providing some support to demand. We forecast the RBNZ to begin raising rates with a 25bp hike in March 2013, but given the trajectory of the inflation data, the risks now are skewed to a later move.
The majority of categories in the CPI basket saw a deceleration in 2Q12. Food prices edged up a modest 0.1%q/q, with a turn in fruit and vegetables prices (+4.3%q/q) offsetting softness in meat and other groceries. We expect a similar (though larger) bounce-back in fresh produce in Australia’s 2Q CPI print next week. Alcohol and tobacco suffered the expected slowdown (from 4.7%q/q to 0.7%q/q) following the prior lift from an excise rise. Household contents and services were flat, with a fall in the price of appliances, while clothing and footwear similarly was benign (0.2%q/q), and the recreation and culture group lost 0.3%q/q, due to lower prices for AV equipment, all of which reflects weaker import prices.
In contrast to global themes, petrol prices (+0.4%q/q) made a significant positive contribution to inflation in 2Q, with the fall in WTI landing too late in the quarter to offset 1Q’s gains. In an ominous sign for next quarter’s print though, Stats NZ noted today that if petrol prices were to average at their end-June levels through to September (and the evidence so far admittedly is to the upside of that), petrol would drag 0.4%-pts off inflation in 3Q. Further, the remarkable slide in the communication group continues, with such prices down 2.5%q/q, due to the continued phase-in of higher data caps for broadband plans, which is lowering the effective cost per unit of data. Prices in this group have now shed 28% over the last year.
Not surprisingly, given the very benign readings in the majority of basket groups, the exclusion measures of inflation looked just as toothless as the headline measure. Most of the ‘all groups less…’ indices came in at 0.3%q/q, and the range was 0.1% to 0.4%. The lower end of that range is generated by excluding housing and household utilities, which is the only group lending any upside bias to inflation in the near term, and explained 75% of the rise in consumer prices in 2Q. The housing group was up 1.0%q/q and 2.7%oya, with rents (0.5%q/q), home ownership costs (0.9%q/q) and energy prices (+3.9%q/q) all posting strong rises, reflecting capacity issues in the building and electricity generation sectors. Those impulses have continued the familiar theme where non-tradables inflation (0.5%q/q) runs a little hotter than prices overall. Given that there is no evidence of spillover from higher house prices or utilities costs into consumer spending behavior or wage claims though, we think the RBNZ will be content to take a broad-strokes perspective on price dynamics, and under that approach it is hard to come to any other conclusion than to say the Bank needs to keep rates low for quite a while yet.
Looking beyond New Zealand’s shores, today’s data has subtle implications as we look toward next week’s 2Q CPI print for Australia. There is a decent historical correlation between inflation in the two countries, which on face value lends some downside risks to next week’s Aussie number. However, much of that correlation holds only in a through-the-cycle sense, reflecting the fact that Australia is New Zealand’s largest trading partner, which means output gaps and currency dynamics in the former generally will be reflected in the latter as well. Only over the last couple of quarters has the correlation been useful in contemporaneous forecasting, due to the narrowly-focused swings in fresh produce prices that followed the recovery in Australian fruit and vegetable production, which were witnessed in the NZ CPI data before Australia’s.
For this reason, as much as we recognize familiar themes in the inflation data between countries – the broad disinflation in tradables groups due to currency strength in particular – the comeback in produce prices in NZ in 2Q is the only explicitly identifiable force that should be witnessed in Australia too. This suggests that the tradables impulse will be offset by the upside in food prices, and in our view leaves us with balanced risks on our 2Q CPI forecast (0.5-0.6%q/q) which we will release later in the week.
(Updates to clarify overnight market pricing before today's figures - that markets were picking a 13% chance of a 25 bps cut at the RBNZ's next meeting, rather than pricing in 13 bps worth of cuts.)
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43 Comments
Without the rise in cigarette prices, the CPI would have risen 0.6% annually, Stats NZ said.
I guess those luxuriating on gold plated inflation adjusted 'pay as we go' pension plans will no doubt be thanking their regressively taxed nicotine dependent cohorts for funding them.
I see it's not just the smokers but also the cigarette manufacturers doing their bit to fund the life styles the entitled have become dependent upon.
Our former worthies know no shame.
Take out the stealth taxes, GST rise, baccy tax, transpower charges, local government rates rises and it's obvious that such inflation we do have is not coming from the private sector. With the big retreat of oil prices as well as heaps of spare capacity here and everywhere else we can expect the CPI to go fully negative next quarter. The US drought may nudge up food a bit but the overall trend is price deflation.
Roger J Kerr won't agree of course. We'll see.
After that announcement we should soon see 5 year fixed mortgages offered at 4.99% and floating rates under 5%.
Don't expect to see an inflationary impact from a Christchurch rebuild anytime soon. It could be two or three years before we start to see any significant volume of construction down there.
A low OCR and low mortgage rates are with us for many years to come!
That price deflation is where we are heading with low rates becoming normal, what I would like to discuss is whether this will affect asset values in the same way it has up to now.
IE: Each new leg down in this 'extraordinary' low rates environment, has seen a corresponding pop in NZ's '10-yr Treasuries', a.k.a. AKL property. As these rates morph from extraordinary to normal in our collective consciousness, will the assets;
- gradually lose air going forward
- remain high but stable
- go from high into a new boom
- see upwards 60% loss in values (like elsewhere) over the next 5 years or so, ending up at what would then be called "fair value" (again, like elsewhere).
Thoughts or predictions welcome on whether this QE effect will see the same diminshed returns as has been the case with other markets...
I think that inflation will not take off and cutting the ORC is not working because every cut people use that money to pay off their mortgage they already have but are just cutting the lengh of the loan. Power prices are huge so is insurances My wife and I earn good money but we still wonder where all our money goes and when we go through it its Insurance, Phone, Power and Rates takes a huge chunk
I don't really have a forecast on the OCR or interest rates in general, except to acknowledge we are in a serious debt deflationary environment. So, of course, there is no way rates can go up. That the mainstream NZ economists have continued to forecast this shows their lack of understanding as to what is happening. Again, that's not a surprise, as they work with models that cannot compute what is occuring.
Since 2008, it's been clear that there was a good chance we would experience a Japan style post-bubble deflationary situation. At the time, there was some hope that the Central Bankers would learn from Japan's error in keeping banks alive (zombie banks) and allow banks to fail and clean up the mess. Alas, they didn't primarily because the banks have the politicians in their back pockets (TBTF) and they suffer from a lack of imagination....that's why history always repeats.
NZ vascillates between being seen as a safe haven with a positive yield curve, strong natural resource asset backing and a relatively unscathed and simple banking system and a country with a severe debt profile. As I've stated repeatedly, lenders to NZ are quite happy to get both relatively high interest returns plus the chance they will own some decent land if the money doesn't get repaid. The country has already been sold, thanks to successive incompetent governments.
So the RB is suppsoed to keep us in the 1% to 3% track. We are at 1% and the trend is probably down, but Westpac see's no real reason to cut.
Taking engineering control systems for a moment, if you are at 1% and the trend is down you take action to halt the drop and set to get bak to the nominal control point fo 2%.....in fact you should have been acting at 1.5%, by 1% the control action should be more severe....so this is lagged....
So the Q is why when the data all points to lower is there no action.
regards
hehehe, yes, though PI might be better....and so easy these days compared to the mechanical stuff or 30 years ago. Of course there is controling the primary loop (global economy) and secondary loops (nations). I wonder how well the analogy stands up.
At a national level, when this is an asymetrical impact why do so little? ie the impact of doing nothing or too little is a self-reinforcing negative cycle/depression, which is obviously highly unstable, uncontrolable and un-desirable. V on the other hand doing too much which in the early stages at least is easy to correct.
So why is little being done?
Is it because the other Q is when the control valves of 155 other countries are wide open and achieving little does NZ's opening do a thing. So are the RB and Govn really far more focused on the global clusterscrew than they admit to...
I cant see the logic....
regards
yep....so is it the RB's inability to see they need to correct, because on a Natioanl level that should be the control.....or are they thinking it just doesnt matter....because we are downstream....?
For Westpac clearly they are in-competent as they appear to only think in terms of NZ, unless really they also think the world really does matter....I do.....
I guess I get the feeling its a case of "do as I say and not do as I do".
and here is an interesting point for PK on the inflationaista...
http://krugman.blogs.nytimes.com/2012/07/16/on-the-curious-persistence-…
"But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien (or, for those who had the misfortune to see me on Squawk Box, a unicorn); they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.
And I know that it isn’t just the Business Insider commenters; pretty obviously, the great majority of people who spend their time watching financial news and reading financial blogs operate in an intellectual universe where the surpassing evil of deficits and the imminence of vast inflation are just what everyone knows; year after year of low interest rates and failure of inflation to take off — which must have cost people who believe this stuff a lot of money — makes no dent in that certainty."
funny as........
regards
Stephen did you read that link to hypertiger from the weekend? His basic theory is that the top make the yield and the bottom pay. Lower interest rates means they have to make up the yield through volume. Ability of the bottom to borrow has now gone, so the next phase is to restrict commodities and force the price of food and oil up, so they can print more money to match this and make up the volume they want. They are just getting their cards in order before that kicks off. Interesting theory and it makes sense.
It's great for genuine savers, but I am sure self determined needy Kiwis are about to revolt and demand that their borrowings be unburdened from real financial cost.
Otherwise how will the private school fees, foreign holidays, car payments etc be financed at no personal cost. Other people's money is their money - right?
Scarfie,,
I now understand your concept of unearned income: just working through the ramifications of it (and the context you use the word beneficary).
What I am trying to work through in my head is that if there is to be no interest there will be no savings or lending?
Savings and lending is fine as long as it is without interest. I know the concept is foreign today, but lending has been done in the past without interest for benevolent reasons. Even the bible says you should not charge interest on money loaned to those close to you.
It is not a requirement for money to function for it to earn (unearned) money. In fact interest detracts from its store of value by eroding its purchasing power.
For a more in depth look at the dangers of interest, take a look at the link raf has posted, there is other work on his website of a similar nature. :-)
Exactly plenty more room to cut rates.
We just need to introduce some decent propery taxes so kiwi's don't use the cuts as an exuse to leverage up into property. That's the only dowside to risk to cutting rates further.
Where is our stamp duty, capital gains tax and inheritance tax that for some crazy reason NZ refuses to impose. While we refuse do so property remains unaffordable, we are too scared to cuts rates further, private debt baloons as we chase property, the kiwi soars on yield advantage and we run up massive government deficits, are we mad?
If you want to understand the role of interest in inflation, then have a read of this paper. As Stephen H notes above, tongue in cheek perhaps, increasing interest rates actually raises prices :-)
http://sustento.org.nz/wp-content/uploads/2007/05/The-Interest-Bearing-…
Nice raf. Makes sense. Remove fractional banking and reinstate banks as savings & loans institutions. Banks are then just the middle man between depositers and borrowers.
Price of many things would have to deflate as consumers practice delayed gratification.
I especially like the following paragraph:
"Weakening finance as the dominant revenue is also inherent in the necessary changes
in the world’s financial structure implied in this paper. This could, in turn, lead to the
third great economic revolution the world has seen, being one based on human and
natural capital in its broadest sense. The third revolution, just beginning, will
recognise and accept the environmental constraints of human activity and ethical
limits to human population expansion, valuing the quality of life rather than, or at
least as well as, the quantity of material wealth"
Anyone noticed the not very subtle price messaging from the Reserve Bank's masters. Its reasonable the banks all come out and give their opinions as to what they think the Reserve Bank will think. If you share though, as I do, Bernard's opinion from earlier in the week that the RB is in the main commercial banks pockets, then their price signalling is really telling him what he should do. None of them has said he should drop rates rapidly, and if that doesn't work, start printing, because their fantastic income streams of leveraging offshore money many times over would then stop very quickly indeed. They don't actually give a toss about the NZ economy.
Grant,
A fair criticism of my comment in that I'm sure the banks give something of a toss. I do though believe that faced with a choice- a healthy NZ economy over the long term that delivered significantly lower short term profits to the banks; or the reverse- that the banks push for the short term profits option, giving us the expense of a very unsustainable current account.
I do believe our current account deficit (and its corollaries, property speculation, uncompetitive manufacturing, tourism and industry, along with massive debt and transfer costs) is nearly all supply of money driven, and not demand for debt driven; and that that paradigm is absolutely driven by our main commercial banks.
So I'm tempted not really to retract my initial statement at all.
Grant A is an undercover Social Media Researcher infiltrating and influencing opinions towards positive appreciation of the banks.
The banks know how to keep borrowers at the maximum rates, while carefully propping up property values .... and of course financing the Living Channel to keep us all doing up the house.
An astonishing finding: That NZ OCR stays flat for longer. We would never have imagined this deflation - we really believed that NZ was about to strongly recover, that inflation was going to sky-rocket & wages were about to rise 4% .....
How about the honest admission: The OCR is never going up for about 5 years or so.
That NZ will see an OCR cut before any rise.
That deflation is kicking in. Asset prices flat or sinking. Wages flat or 1% rise. People feeling lucky to have a job - even if they're twice as busy as the boss ain't hiring new staff.
So stop worrying - enjoy low mortgages for longer. Who cares if your house value drops? At least it's easier to service your mortgage.....
Stephen/Mortgage Belt - actually yes, I've been on both sides of the fence, and when I was in banking (two of them), high enough up to know what drives them and what their corporate culture is. And it does irritate me considerably when populist comments are made based upon very little fact.
I don't think banks are any greatly different to other corporates, they have good intentions but also have a bottom line to achieve and shareholders to support. They certainly want a healthly NZ economy but the market will dictate what profits they can achieve. And I'm not convinced about your supply of money argument as it absolutely smacks of the socialist ideal that its not my fault I borrowered the money, its the banks for letting me. Yes banks could chock off the supply of money, but when that's happened in the past, they win no friends then either. I'm afraid they will always be targets of the suspicous and ilinformed who dominate on such forums compared to those in a position to have an informed opinion.
Grant,
Your main comment is fair enough, the banks are like other corporates. Asking them what interest rates should be is like asking oil companies what petrol prices should be; or Fonterra what milk prices should be. They are all experts in their fields, but to not recognise a conflict of interest, is more fool us if we take their advice as gospel. And of all of these, interest rates have by far the higher impact- unless you are a dairy farmer, and good luck to them I say. I have also dealt with the banks, and actually have a good number of shares in them- they for sure will prioritise short term profits- and why wouldn't they. My real criticism is for the Reserve Bank, who do seem to follow the interests of the banks, even when they seem to be very contrary to NZ's best long term interests- as Bernard noted earlier this week.
You are right that individually we do not have to borrow money from them, but you cannot expect individuals broadly not to maximise their future potential within the system as it is played. Its the Reserve Bank and the government that should be doing the game theory and managing the macro economy, and they have abdicated their jobs.
Individuals also have to manage around the exchange rate as it is.
Projected current account of 6.7%. What is your solution?
Agreed Stephen, and I'd certainly agree that the banks can be far too short-sighted at times due to the markets fixation upon quarterly earnings results. As far as the RBNZ is concerned, I guess they have been starting to make moves to exert some control through the likes of core funding ratios requirements etc, a good thing provided they maintain the integrity of the free market. With regards the current account, its been a problem for decades and I don't have a quick solution for that.
If we look at the issues it comes down to we're poor savers (the banks have to access funding from offshore and our lack of a proper capital markets means we can't fund our own local infrastructure such as banks, and hence dividends flow offshore), and we under-perform export wise. The likes of lower taxes, financial education, and compulsory superannuation may take us in the right direction on the savings side over time, but in the short-term, it has to be about raising our export game. And that means being realistic that we will continue to under-perform unless we're prepared to drill, mine, put wind farms up, make a greater use of our water resources (in a sustainable way) etc etc. Of course the minority will stop that, the same minority who then always complain about the Govt not creating enough jobs.
What does Mr Hendry believe?
At the Milken Institute conference in May, he told the audience that France was just a year away from nationalising its banks and that politicians had still not faced up to the scale of the global debt bubble that was now imploding.
“We have reached a profound point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond – and it terrifies them.”
Three years after Mr Hendry posted videos on YouTube of his visits to Chinese ‘ghost’ towns, he remains pessimistic about the Middle Kingdom. He is shorting the equity of Chinese state-owned enterprises, balanced by a long position in a basket of Asian non-discretionary consumer stocks.
He is also using credit default swaps to bet against the debt of financially leveraged Japanese companies such as Toshiba, which he believes are particularly exposed to a Chinese slowdown.
Mr Hendry insists that his reputation as a “contrarian” investor is wrong, and that his approach is in fact to take advantage of the prevailing momentum in markets. “Our ideas are harshly disciplined by market trends. You will never see us pursue a homegrown idea when it is to the detriment of the prevailing trend.”
For example, he reckons US government bond yields, already at record lows, will continue to fall. And, although he professes not to be a contrarian, he is more optimistic about the US than many investors and is “long the debt-saddled west and short the vastly over-vaunted and over-owned” Bric quartet of Brazil, Russia, India and China.
He believes that financial markets are single-digit years away from a crash that will present investors with opportunities of a lifetime. “Bad things are going to happen and I still think the closest analogy is the 1930s.”
http://www.zerohedge.com/news/hugh-hendry-when-i-speak-tv-it-gives-impr…
NZ Heads - if you actually knew anything about interest rates you possibly could talk about them on here, but you've shown time and again that you don't understand what factors comprises an interest rate, so why do you bother us with such uninformed comment. Surely theres somehting you can contribute based upon knowledge ? ...mind you I'm the only dumb sod who seems to respond, I must learn to ignore as well.
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