A review of things you need to know before you go home Tuesday; deposit rate changes; fee-free education; potential rate cuts; Barfoot numbers; ANZ Commodity Index; Crown accounts; building work; Trump's travel ban; rates and NZD higher

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes to report today.

DEPOSIT RATE CHANGES
BNZ and The Co-operative Bank have changed their term deposit rates. BNZ has decreased its 6 mth rate and increased its 1 yr rate and The Co-operative Bank has marginally reduced its 2 yr rate.

FEE-FREE EDUCATION
The Government has announced a policy to make the first year of post-school training and education and industry training free from 1 January 2018. If you are school leaver in 2017 or 2018 or have less than half a year of post-school education or training, you qualify for the first year of free education. This comes in addition to the $50 increase in student allowance and student loans weekly living costs limits, which will make 130,000 students better off. The Government has budgeted for up to $380 million in the current financial year for the fees-free policy and the $50 increases to student loans and allowances.

POTENTIAL RATE CUTS
The Reserve Bank's suggesting it may yet have to implement further interest rate cuts from next year if the forecasted increase in the rate of inflation doesn't materialise. Inflation in New Zealand and world-wide has been persistently low since the 2008 global financial crisis, partly because of factors such as globalisation, the growth of China, the rise of the digital economy, and low inflation expectations.

BARFOOT NUMBERS
Barfoot and Thompson have had sales, at 757, in the last month at the lowest point for a November since 2010. Conversely, new listings are at 1955, the highest number for a November in the last 10 years. This combination has increased inventory to the highest level for a November since 2011. The only good news is that prices have stabilised, with the median at $830,000 and mean at $913,244.

ANZ COMMODITY INDEX
The ANZ Commodity Index is down 0.9% month-on-month and up 6% year-on-year. In New Zealand dollars, the index is up 1.5% month-on-month and up 12% for the year, driven by the weakening currency, which was down 2.1% month-on-month. The index has fallen for four out of the last five months. Dairy prices were the primary reason for the falling index last month, although only nine of the subcomponents fell and five rose. Meat prices held up better than expected, horticulture prices lifted, forestry prices continued their two year run and aluminium prices fell 1.5%.

CROWN ACCOUNTS
Crown debt is at $61.4 bln or 22.9% of GDP. Operating balance before gains and losses (OBEGAL) for the financial year to date is at $308 mln, close to the forecast deficit of $217 mln. Operating balance for the financial year to date is at $2,079 mln as opposed to the forecast $714 mln. Crown tax revenue was $24.2 bln and expenses were $26.6 bln.

BUILDING WORK
Nationally, building activity was up 6.4% year-on-year in the September 2017 quarter. This was driven by residential activity picking up 9.7% and non-residential activity was also up 0.6%. The value of all building work put in place in the September quarter was $5.5 bln.

GOVERNMENT BOND YIELDS
The difference between the US Treasuries and New Zealand Government bond yields continues to shorten as US rates rise and NZ rates fall. On one hand, the difference represents the risk premium investors pay for holding NZ Government bonds over US Treasuries as NZ sovereign debt is assumed to be more risky, but if we stop assuming that markets are perfect, the difference is simply the difference in expected baseline rate of returns in the two economies. In this instance, it is unlikely that risk profiles of the two economies has changed and instead this is a result of the market expectations of baseline returns in the two economies converging.

TRUMP GETS TRAVEL BAN
The US Supreme Court has given President Donald Trump's plan to ban people from Chad, Iran, Libya, Somalia, Syria and Yemen from entering the US the go ahead. The ban can now be in full effect and will fulfil one of Trump's key election promises.

RURAL BANKING
A survey by Federated Farmers has shown that farmers' satisfaction with banks remains stable and the size of mortgages and number of dairy farms with overdrafts has increased. Of the 480 farmers who responded, three quarters felt under the same pressure from banks as they did six months ago, 8% felt under more pressure and just under 10% were feeling less pressure.

BNZ NAMES A NEW HEAD OF RETAIL
Bank of New Zealand has announced the appointment of Logan Munro as their new Head of Retail Network. He is currently the general manager for Branch Banking. He brings a wealth of experience in building customer advocacy and engagement, which will help the bank reimaging banking and how it meets the needs of its customers.

WHOLESALE RATES HIGHER
Swap rates are flat for 1 yr, up +1 bp for 2 yrs and up +2 bps for the rest of the curve. The 90 day bank bill rate is flat at 1.90%.

NZ DOLLAR HIGHER
The NZ dollar is up to 68.9 USc. On the cross rates we are at 90.3 AUc and 58.1 euro cents. The TWI-5 is now at 71.7. Bitcoin is at US$11,576.

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4 Comments

So the RBNZ Governor is freaking out because the inflation target has been met. We've achieved our goal, time to put on the brown pants. It's obvious that they have figures showing that the flow of money into the financial system must be seriously impaired. If the RBNZ thinks the wheels are about to fall off we should all tread carefully.

Pay down debts, especially consumer debts or short term leverage and accumulate cash.

Yep.Pay down debt like crazy!!!The ships about to take on water!!!

How is 1.90% YoY inflation labelled as missing the 1-3% target? I guess math is not really the strong suit of RBNZ's economists.

The Reserve Bank's suggesting it may yet have to implement further interest rate cuts from next year if the forecasted increase in the rate of inflation doesn't materialise.

Where lower official interest rates equate with "stimulus"?

We need to first make sure we define our terms. Deflation means a general decline in consumer prices. This is distinguished from specific declines as might arise from productivity and technological innovation. A general decline is a monetary phenomenon, not an economic one. This chronic condition is so feared by economists that they have chosen to target a 2% per annum inflation rate (3% in China; 4.5% in Brazil) lest "expectations" of deflation ever become grounded or "anchored.".

Thus, the decline of interest rates to zero corresponds with a monetary imbalance in favor of deflation, if at least an abundance of deflationary pressures. This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks. Read more, more, more and more