A review of things you need to know before you go home Monday; both mortgage and TD rate rises, fewer building consents, NBFI growth tame, swaps stable, NZD firms

Rate doctors everywhere.

For Australian central bank watchers, it seems no one is neutral on where neutral actually is.

Economists and money markets are betting the point at which interest rates are neither stimulative or restraining is lower than the central bank’s estimate of about 3.5 percent. And if markets and analysts are right, that means there’s less stimulus in the economy than the RBA thinks, even before factoring in the tightening effect of a rampaging currency.

While the board will likely leave its official cash rate unchanged at a record-low 1.5 percent Tuesday, the release of the neutral estimate almost two weeks ago sent the Aussie dollar soaring in the belief policy makers were laying the ground to tighten. It was only after Deputy Governor Guy Debelle and Governor Philip Lowe used speeches to dismiss the significance of the rate’s inclusion in the July minutes that the frenzy briefly eased.

The RBA estimated the neutral cash rate at 3.5 percent: equivalent to a real rate of 1 percent plus the 2.5 percent midpoint of its inflation target. But it’s notable that CPI hasn’t reached that midpoint since mid-2014; indeed five-year inflation swaps show 2 percent is a more realistic average for inflation, which would provide a neutral rate of 3 percent. The median of 10 economists surveyed by Bloomberg was similarly 3 percent. Read more

Asset purchases like those through quantitative easing are here to stay, no longer specific to the emergency or extraordinary category. What was unthinkable in 2007 is now ordinary. The reason is the statistical view of economic decay, the so-called natural rate of interest, or R* (or R–star). By the best guesses of economists, R* has fallen so low that they will no longer be able to raise short-term rates very far.

How do they know what R* is or has been? Perhaps the pre-eminent scholar working on the modern interpretation of the natural rate is San Francisco Fed President (and CEO) John Williams. In a paper published the day after the FOMC voted for its second “rate hike”, Williams along with co-authors Kathryn Holston and Thomas Laubach wrote:

“Although economic theory provides insights into the various factors affecting the natural rate of interest, measurement of the natural rate of interest has proven more challenging. This arises because the natural rate, like other latent variables, must be inferred from the data rather than directly observed.” [my emphasis]

In other words, they don’t really know. What they do know is that interest rates all around the world have fallen to extremely low levels, sometimes hugely negative levels, and therefore there must be “some” reason for it. Trying to reconcile how such massive “stimulus” failed to stimulate anything, they come up with a very low R* that, again, preserves monetary policy as “stimulus” while recognizing this reality where by public perception at the very least the world hasn’t turned out the way it was supposed to when subprime was contained.

In February this year, Williams wrote the following: “the U.S. economy has fully recovered from the recession following the financial crisis, and the most recent estimates of r-star there have shown no signs of rebounding.” The most obvious inference from that statement is that he is using the word “recovery” in a way that is very different from what it actually means. Recovery, as in the business cycle segment, means just that – complete healing from the trauma of recession. What Williams wrote instead was that the economy has fully recovered even though there is no sign of it having healed even slightly. He has detached monetary policy from reality because he thinks he can. Read more

Why is there a hefty premium for floating over fixed?
Is it to incentive borrowers to fix to ensure bank lock-in?

Great journalism here from the herald:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…

I love this quote:

"There was a strong process and technique," Choong said. "There was hope and emotion that the house will sell."

Well as long as you have "hope and emotion"...

I'm not sure why this goes on website except to try and create an impression the market is still bumper.

Barfoot's July data will be a centuries low. How will it be spun.

The RBNZ C30 data released last week, shows the regional issue , and how one city has engulfed housing and will at some point provide calamity.. Using the C30 data which provides monthly new loans and increases in existing loans, Auckland which accounts for approximately 30 percent of the nations housing stock , in the past 6 months sales have slumped to just less than 30 percent of national property sales, (having come down from the peak of 40 percent thru most 2012-2015 - who says there was no speculation ), yet at present accounts for 50 percent of all new lending /loan increases. Proportionally bizarre and yet prices have stalled or indeed fallen if the HP index has belief. Put another way New Zealand ex Auckland, accounts for just over 70 percent of all property sales, and only accounts for 50 percent of new loans or the increase of existing loans.