David Chaston looks at the impact of the rate cuts announced by banks so far, and what will be required to pass through all of the RBNZ OCR cut. He sees returns to savers in the crosshairs of bank interest rate strategies

David Chaston looks at the impact of the rate cuts announced by banks so far, and what will be required to pass through all of the RBNZ OCR cut. He sees returns to savers in the crosshairs of bank interest rate strategies

A 50 basis points cut to the Official Cash Rate (OCR) sounds impressive. We get moves that large rarely.

In his announcement Reserve Bank of New Zealand Governor Adrian Orr exhorted investors to invest, consumers to spend.

Banks then chopped the full -50 bps from their floating mortgage rates, but little else.

If Governor Orr and his committee really want their policy to impact the economy, there will have to be much more flow-through than that.

To give a sense of just how little response the OCR change has garnered so far, here is what has happened:

At best, over a full year, this stimulus should save $850 million for consumers and businesses. While this is a substantial amount, in terms of annual economic activity as measured by nominal GDP, it represents stimulus of just +0.3%.

Overall, the -50 bps official cash rate cut looks like it will result in a reduction of -18 bps in interest cost over all debt. ($852.6 mln interest cost savings in a year for $464.4 bln in total debt.)

  NZ$ bln Effect of OCR  
    cut so far  
    for full year, NZ$ mln Assumptions
       
All debt (C5) $464.4 852.6  
       
All housing debt 267.1 222.5  
of which      
- floating rate debt 44.5 222.5  
- fixed rate debt 222.6 0.0  
       
Credit card debt 7.3 0.00  
Personal loan debt 9.5 0.00  
       
Business bank debt 116.9 391.5 assuming 2/3 is floating
       
Rural debt 63.6 238.5 assuming 3/4 is floating
       
NZ annual nominal GDP (M5) $296.2    

To get the effect the RBNZ wants, real economy interest rates would probably need to fall much more. And that will require banks to pass through the reduction on a much wider set of debt.

The largest item in the table above is fixed-rate housing debt.

Following the OCR cut, wholesale markets bid down swap rates by -16 bps to -20 bps. In fact wholesale markets had been bidding rates down for a while, primarily on the expectation of a -25 bps OCR cut. Since the start of July, these wholesale rates have decreased about -35 bps. Most of this has not flowed though to fixed rate mortgages however.

Most mortgage funding is sourced from retail deposits. In fact, the RBNZ's Liquidity Policy regulation (especially for Core Funding) has limited the ability of banks to fund mortgages from wholesale sources, whether they be onshore or offshore.

So that means banks are left with a choice of whether to cut term deposit rates, so they follow the OCR and wholesale rates down, or not. If they choose to hold retail term deposit and savings rates at broadly the current level, then it seems unlikely that fixed home loan rates will come down much.

But if the RBNZ wants businesses to borrow and invest, and consumers to borrow and spend, this won't happen unless savings and term deposit rates fall.

Fifty basis points across the whole set of debt in New Zealand will cost $2.3 bln per year. That is 0.8% of GDP. Given that only $852 mln has been passed on so far, that means that the remaining $1.4 bln could be at the expense of savers returns for their deposits. Essentially it will be a wealth transfer. There may be good public policy reasons to do that (to encourage lazy money to be redirected to better use), but banks won't just let that happen because it will put them in a bind with the RBNZ's Liquidity Policy if savers depart en masse.

The next competition could be for consumer liquidity. In any event, it does seem very unlikely that this will allow fixed home loan rates to fall much further.

That is not to say there is no room to move. A combination of changes might include small reductions in deposit interest rates, rolling back some of the excess Core Funding Ratio cover, some bank margin reduction, tighter standards for mortgage 'specials', and rising competition from challenger banks. Each bank may have different abilities to adopt some of these to gain a market advantage. The RBNZ will need to watch that credit standards don't fall in the desire to hold and build lending activity.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Cue the TD holders' ranting how cuts do nuffing and how the OCR should be ramped up to 30% to show the confidence we all have in the economy.

11
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Funnily enough, you're on to something! At their basic level, today's interest rates tell us what the expected price for assets, goods and service will be in the future + a margin for the risk of lending.
An OCR of 30% would tell us prices are going to rocket. An OCR of 1% tells us they are likely to fall in a heap. 1%, less Risk Margin of 1% or more, tells us prices are going to fall - and heavily.
But time will tell, as always.

That is exactly incorrect. Interest rates set the cost of money, as the cost of money falls the number of units it takes to buy an asset rises. Consider an asset worth $1,000 that generates $100 in income and costs $100 in interest, halve the interest rate and now it costs $50 but generates $100. To return to its previous yield its price has to double. Reducing interest rates drives asset prices up.

That is exactly incorrect. Interest rates set the cost of money, as the cost of money falls the number of units it takes to buy an asset rises. Consider an asset worth $1,000 that generates $100 in income and costs $100 in interest, halve the interest rate and now it costs $50 but generates $100. To return to its previous yield its price has to double. Reducing interest rates drives asset prices up.

Yiu are correct....using overly simplisitic assumptions and dogma. Case in point: Japan.

Your case in point is a dead country, clap, clap, clap...

Your case in point is a dead country, clap, clap, clap...

OK. Just make your case more clear. For example, if your simple behavioral model only applies to the Anglo Saxon kingdom, then say so.

In most ways that matter Japan is in the Anglo Saxon 'Kingdom' :-)

Huh? All the orthodoxy in the Anglosphere is saying "she'll be right" because Japan hasn't collapsed and that we can follow Japanese policy making too.

The reality is that we can do what Japan has done and not experience any deflation or negative consequences from the debt splurge is wishful thinking. There is no evidence to suggest that we can inflate our way out of it.

If you are trying to say that this huge monetary experiment doesn't seem to have a clean exit available then of course it doesn't. But you can be very sure central banks learnt a lot from Japan and they will be able to play this out soooo much longer than you think. They are much too deep in to even seriously consider reversing their way out.

More importantly: the interest rates are falling as we have entered a Deflationary cycle. During deflation cash = king and debts will become heavier. Asset values backed by debt (like heavily leveraged housing) will do just that: deflate.

I understand that the majority of Interest.co.nz posters have an extremely hard time grasping deflation.

The reason they have a hard time grasping deflation is because they can just print money.

QE (which is not printing money by the way, rather it is an asset-swap) has not solved Deflation.

I didnt say QE, i said printing money :-)

Modern Money Theory? Help me out here as I don't recall that being reality (yet).

Basically you can monetize via two core pathways. The primary pathway is to subsidize assets through bond interest manipulation. This pathway has a direct link to asset values and will reflate a depressed market but has limited transmission to CPI largely constrained to 'fees'. The second pathway is stimulation of income via government programs and even literal money printing. This pathway will directly hit CPI.

The Second Pathway will probably also see the introduction of CBDC's with an interest rate independent from Cash, in order to phase out the latter.

And consequently, the appearance of Full-Reserve Banking.

One day id say so yes, the trap is sprung.

Well, this is neat huh. Basically we either subsidise asset prices in a failed attempt to stimulate growth or we hand money out to people to spend whilst having it being lambasted as middle-class welfare. When really they're two awfully similar things.

That's the game we play these days. I don't like any more than you do.

It only drives up prices in the case that the supply is relatively inelastic.
So long as the expansion is commensurate with an increase in productivity, there is no reason why asset prices would increase in real terms.

Endogenous market interest rates are primarily a function of expected medium to long run increases in MPL and MPC.
The OCR is a (seemingly) exogenous tool in that it is a blunt force enacted proactively. The idea being that if it is set lower than this expectation plus any premiums (that bw alludes to), we can continue to stimulate productivity growth by arbitraging the endogenous market rate and the exogenous market rate. Obviously, in a cyclical sense, this is a symmetric effect so as we get one happy Keynesian model in the long run.

Japan's is not a dead country - as J.C highlights, it is a perfect example of why asset prices need not increase during expansion if productivity can also grow.

While true thats not very relevant as in most cases the supply of assets is relatively inelastic over the relevant time periods. As to Japan, im not aware it has anything other than pretty ordinary productivity growth. Its a great country in many ways but it doesnt grow in the sense of GDP or population and is still packed with plenty of zombie businesses.

You have to define what you mean by 'assets'.
If you are talking about typical capital assets, you are categorically incorrect in an economic sense - medium/long run supply is not inelastic in probably 99% of productive capital assets.

If you are talking about intangible assets, perhaps - but they aren't really productive.

I mean assets like business, properties, farms, factories and such. These assets can not materialise overnight. When you cut rates these assets become immediately more profitable to purchase using debt. You can bid a buildings price up much faster than you can build a new building.
The immediate result of cutting rates is not usually going to be a big boost of supply but rather to boost their prices. Overall you will actually reduce total usable production as you push your economy to finacialise.

Correct Laminar, yields move with the cost of borrowing and in opposite direction to asset values, practical example:
You own a commercial building that has a rent of $100k pa, if the yield is 6% the building is worth $100k/6% = $1.667 Mill
When interest rate goes down so does the yield (because it's less expensive to own the property) so now if the yield reduces to 5.5%, your same building that still has a rent of $100k pa is worth $100k/5.5% = $1.818 Mill
And yes, the supply is inelastic because you can't build a same building overnight or even over several months to compete with it

The real yield change is only temporary.
Because....In the medium term, supply is elastic.

The result of interest rate impulses is a mean reversion. If this was not the case, we wouldn't use the tool symmetrically.

Its not as elastic as you may think. Take a country with a million houses that builds 25,000 pa. When you cut rates those million houses all become more profitable to own but your rate of building isnt going to change much without huge time lags for training, equipment, supply chains etc.

Look at all the research in New Zealand.
At the aggregate regional level, housing supply is almost unit elastic over the medium term. That is exactly why productivity and labour shocks don't stimulate prices in New Zealand.
This is well documented - even by a piece by Motu on here a couple of weeks ago.

Its not comparable. In effect you are saying over the medium term NZ building capacity is about right for the sorts of pressures it usually faces. That is exactly what you would expect. However an interest rate drop can take you well outside of normal pressures and set profitability at levels well above what capacity can meet.

But that's exactly the point. Any short run profit as a result of short run capacity constraints is eroded over the medium to long term.
As I said, with your example, we have short term inelasticity in the housing market but this does not translate to long run increases in price.

The building industry can not overpower interest rates medium term. Its just implausible to radically change the maximum rate of building so significantly over only 3 to 10 years. Long term sure, eventually, but the catch is the reserve banks and govts will be fiddling away during that time as well to engineer more life in to the system.
Which is why i said: "the supply of assets is relatively inelastic over the relevant time periods".

They become immediately more profitable in the case that they benefit from reduced interest exposure.
Given that pretty much any business operates some form of forwarding security, I doubt the effect is as much as you believe. Back to what bw was saying - these are effectively already priced in.

And any increased demand stimulates labor and production supply responses in the medium to long terms. That was the point - yes there may be some initial increase, but the growth is mean reverting - positive growth today means negative growth tomorrow.

"Overall you will actually reduce total usable production as you push your economy to finacialise."
Well. No. Because that's the idea. You are making labor and capital investment artificially cheap - you are incentivising the investment in greater productive potential.

Its actually mostly a smoke and mirrors change to values. In terms of machinery, workers etc these are usually scarce resources and all you can do short term is reallocate from one area to another.
Take a car factory in a crowded market, if you cut rates that car factory will be more profitable when considering it as a purchase. You could suppose that start ups would try to move in on that action but that process is going to be very slow and the start ups funding costs will still be rather high. Meanwhile the established players are borrowing to generate huge piles of cash, they can bully or buy start ups.
The process of reallocation is slow, and all the while the influx of cash from increased borrowing is baking in higher prices throughout the asset chain and showing up as increased dividends and asset prices. Why take the risk of a chancy start up when you can just buy existing assets and cream a sweat profit right off the bat.
When you cut rates you dramatically incentivise borrowing and this drives a huge industry to bloom: issuing, maintaining, securatising, trading and managing those debts. That industry hires extraordinary talent and this removes usable productive capital from the industries where you actually want it. When you cut rates the financial industry will begin to crowd out the real economy.

"In terms of machinery, workers etc these are usually scarce resources and all you can do short term is reallocate from one area to another."
Yes. And in the medium to long run, these are mean reverting - the initial impulse has no long run effect on employment or wage levels.
And, also, in small economies such as New Zealand the labor response is extremely fast. In terms of both mobility and capacity growth.

"Take a car factory in a crowded market, if you cut rates that car factory will be more profitable when considering it as a purchase."
Well. No. It won't because the lower cost of borrowing capitalises into the value of the company - exactly why we see stock prices surge.
It may become more profitable due to lower interest costs to the existing owner, but not to a prospective buyer. And. Like I said, no businesses has a huge amount of interest rate risk, as you seem to think.

"When you cut rates you dramatically incentivise borrowing and this drives a huge industry to bloom to issue, maintain, securatise, trade and manage those debts."
I don't disagree.

"That industry hires extraordinary talent and this removes usable productive capital from the industries where you actually want it in. When you cut rates the financial industry will begin to crowd out the real economy."
You are mixing up your economic terms.
Extraordinary talent implies extraordinary productivity/skill - it's not necessarily a wage inflation issue so there is no capital miss-allocation in the way you allude. Also wages are a 'labor productivity' function, not a 'capital' function.
I don't see how finance companies can "crowd out" the market... The market interest rate mechanism is agnostic to the public sector...

("In terms of machinery, workers etc these are usually scarce resources and all you can do short term is reallocate from one area to another."
Yes. And in the medium to long run, these are mean reverting - the initial impulse has no long run effect on employment or wage levels.
And, also, in small economies such as New Zealand the labor response is extremely fast. In terms of both mobility and capacity growth.)
Im not clear on your point. Im saying you cant just add a lot of extra production simply because rates dropped. You can reallocate but interest rates create wide spread pressures so i dont see how you can magic up the extra you need to mitigate the effect of rising asset prices.

("Take a car factory in a crowded market, if you cut rates that car factory will be more profitable when considering it as a purchase."
Well. No. It won't because the lower cost of borrowing capitalises into the value of the company - exactly why we see stock prices surge.
It may become more profitable due to lower interest costs to the existing owner, but not to a prospective buyer. And. Like I said, no businesses has a huge amount of interest rate risk, as you seem to think.)
The reason it capitlises in to the business value IS because it becomes more attractive to prospective purchases. We are saying the same thing. Businesses that have tranched their debt will still discount the future coming drop in to their value.

(Extraordinary talent implies extraordinary productivity/skill - it's not necessarily a wage inflation issue so there is no capital miss-allocation in the way you allude. Also wages are a 'labor productivity' function, not a 'capital' function.)
The term is 'human capital'. When you allocate talented human capital out from say a software company, and in to a HFT company you basically deleted the human from the economy.

(I don't see how finance companies can "crowd out" the market... The market interest rate mechanism is agnostic to the public sector...)
As the pool of debt, securaties, buy backs etc increase the pool of staff required to manage that industry increases. That crows out other productive pursuits. Like above the software company has lost a developer to an HFT company.

What? This is a word salad of economic terms...
You don't delete human capital when you reallocate labor...Yes, you may no longer maximise (individual) labor productivity, but you don't decrease human capital. You missallocate it resulting in a depression of growth in human capital..

A private company cannot "crowd out" anything because of the reallocation of labour.
There are very good reasons for this. You are mistaking what crowding out is and why it most definitely does not apply here.

I think we are not understanding one another. If i pay a man to dig a hole and another man to fill in that hole then that is wasteful. It is my opinion that paying a man to run HFT's is wasteful and i would rather have that man working at IBM etc. When i say the financial industry crowds out other industries i simply mean they are hiring talented people, which makes them unavailable to other industries. Broadly this can be seen in the financial sectors contribution to GDP which has risen very substantially since the 1950's.

When you say a private company can crowd out other companies competing in the same broad labour market, you dont know what you are talking about.

The increase in the services sector contribution to GDP highlights productivity returns to technology, labor and human capital. It doesn't at all say what you are trying to incorrectly reason.

I think you are purposefully sticking to the classical use of the term 'crowding out' rather than understanding its meaning semantically. The term 'crowding out' is useful even outside of government spending, for example: https://www.bis.org/publ/work490.pdf

BIS Working Papers
No 490
Why does financial
sector growth crowd out
real economic growth?
by Stephen G Cecchetti and Enisse Kharroubi

"In this paper we examine the negative relationship between the rate of growth of the financial
sector and the rate of growth of total factor productivity. We begin by showing that by
disproportionately benefiting high collateral/low productivity projects, an exogenous increase in finance
reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial
sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labour
works in finance, the financial sector grows more quickly at the expense of the real economy. We go on
to show that consistent with this theory, financial growth disproportionately harms financially dependent
and R&D-intensive industries. "

***Searches furiously for anything to support his narrative.
Finds one working paper that manages to avoid the use of the term 'crowding out' in all but the title.
"See, I was right".

It's not about semantics. If you want to throw around terms like crowding out and human capital, at least know what they mean.
This also goes for this paper that you link - have you actually read it?
Because they do absolutely no time series analysis; it's all cross sectional. Essentially they reduce the case down to asking what the correlation is between TFP growth and expected financialisation levels at a single point in time.
So, no, it does not at all prove your narrative in a long run dynamic setting.

Seems to me that floating rate cuts are exactly what the real (as in producer) economy desperately needed.

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"There may be good public policy reasons to do that (to encourage lazy money to be redirected to better use)"

Propping up the property and share market bubble is the likely outcome. Is this what you mean by better use?

Exactly. There's an assumption that a better place to put the money exists. Yet the obvious - shares and property - are already overpriced.
I suspect the only entity that could actually use the money usefully is the Gov't. If money is being created for the sake of it, I'd rather it go on new schools, subsidised housing, DOC etc. than to further blow up asset bubbles that are bound to crater anyway.

Well...Auckland Council does need to raise rates.

Indeed, is the RBNZ going to come to the rescue after it’s encouraged people to put yet more money in the highly inflated housing market, and a sharemarket that’s already risen 340% in 10 years? Note that this week came news that Warren Buffett unusually has been a net seller of shares in the last quarter, hasn’t bought much since 2017, and is sitting on $120 billion in cash, waiting to deploy when stocks look cheap again. He’s never correct though, right?

Thanks for a great article David

Confidence is starting to collapse and the central banks are trapped with no way out. The RBNZ seems to be following the failed ECB policies of the last 10yrs and the future is looking bleak. Christine Lagarde, former head of the IMF and soon-to-be head of the ECB is emblematic of the rot and incompetence at the highest levels. She is a lawyer with no financial/economic knowledge or experience. She is an advocate for going fully electronic and taking away cash, interest rate controls and more centralised control of the economy. A recipe for disaster. If you have all your savings in TDs, then be seriously worried about the longer term safety of those deposits and make a plan to diversify.

Agree with you Ludwig; central banks are becoming limited in their way out and seem to postponing the inevitable. Rate cutting over the past decade seems to be an ongoing stop-gap action without seemingly addressing underlying issues.
I also agree TD holders need to be worried and plan to diversify - however any potential risk of actions by Lagarde are well and truly overshadowed by the certainty of considerable diminishing returns which are prompting this.

QE and interest rate control as measures are too indirect.

Lagarde will probably introduce Full-Reserve Banking based on CBDC's and that will be the end of Retail banks.

Good luck taking away cash from the Greeks and Italians.

Savers beware
Saving is for mugs

50bps moves are rare. occurring once in September 2001, (but were soon reversed) again during the "GFC " when rates were dropped from 8.25- 3.5 percent , and the most recent in February 2011. All were associated with well defined 'events" .Yesterdays drop , cutting the OCR by a third and by 0.5 percent has only occurred on one other occasion , December 2008.

I look forward to the Sealy SaferPedic adverts: an organic cotton hideyhole, within each pocket spring, nicely sized for Krugerrands.....now, into which of them 1,728 slots did I - er - Stash my Stash. Oh, just ask Alexa.....

It's not just depositors, it's insurance companies and your pension. Share markets top out, assets are over priced, investors don't want to invest in production, economy stagnates. Who wants to take a risk for a measly %2. Deflation is waiting quietly in the wings, as costs go up in the non tradable sector, producers get squeezed, see Belles comment yesterday, profitability is getting crushed by rising costs in a low inflation environment. Businesses will cut and cut to try to extricate themselves.
More and more people are expecting deflation.

'Ludwig Von Mises: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Deflation is definitely here soon.

And the Interest.co.nz audience including its writers can't wrap their heads around it, it appears.

Let alone the rest of New Zealand.

The question is what will Gold do during Deflation? If history is any guide it will go DOWN in value (but other assets will go down MORE).

we know it's here because Central Banks are going all out to fight it.

The question is what will Gold do during Deflation? If history is any guide it will go DOWN in value (but other assets will go down MORE).

Good question. However, it potentially could retain elevated prices for longer considering any deflationary should take a heck of a long time to extinguish the planets of debt (money) floating around the world.

it will be strong because there is no claim against it.

I think sometime around the late 80's early 90's our monetary system broke. Since then all we have had is credit growth and that is now requiring lower and lower interest rates. We stopped focusing on sustainable productive growth.

listen from 18 mins
https://www.youtube.com/watch?time_continue=1289&v=a4_U6bS-cU4

I say that the Government should now issue fixed term ( say 5 years) infrastructure bonds at say 3% for those oldies with their savings going south; this is still cheap money for the Government and would keep the oldies happy.
Although if Fletchers hit the wall who is going to build all the infrastructure backlog which has been touted ( recently by ANZ economists for one) as the saviour of our economy going forward? China by default? They will bring their own labour force.
Shane Jones will provide the money for regional infrastructure from his fund: I hear Eketahuna want their own light rail, Taumaranui want a new Bridge to Nowhere, and Greymouth want a stadium with a covered roof. Come on Shane, rattle your dags.
But the cities need the big stuff fast: Auckland needs to pull finger on the light rail before all the adjacent shops go bankrupt, although they will still go bankrupt after it's built because the tourists won't stop want to visit the same old shops that can be seen in every other city in the world; they will want to get out of the city ( by the rail) as soon as possible. Wellington needs to mothball the high towers housing government departments and decentralize them to the regions now that we have 5G internet coming; this will prevent a blood-bath when the 'big-one' hits Wellington. And there's plenty more that's needed.

The government aint going to issue 5 year bonds at 3%. Current market has them at 0.85%. In this market 3% is far from cheap money.

I'm sure I saw a graph earlier today on CNBC Squark Box Europe indicating a significant number of government bonds showing negative returns!

easiest way to get money taken out of the banks is send a signal that OCR might kick in,
watch the money fly out then. But it still wont get spent,
instead it will be hoarded away for a rainy day
thats what the RBNZ dont get, human nature, when times look bad tighten the belt and cut back

On that note, what's the best way to invest in gold?

Buying GOLD (ETF) on the ASX would be fairly easy. Probably liable for tax on gains since shares would be bought with the purpose of capital gain, at least in theory.

Morris and Watson is a gold refinery in Auckland. You can hold a "gold account" with them in which they store your gold and send you a monthly account, or you can pay something like 30 bucks and have your gold cast into an ingot cast and take it away with you. Bear in mind the roundtrip ($->Au->$) cost is about 3%-5%, more if your're buying small quantities less than 1kg

The NZD is ratcheting back up: it reached down to .6378 yesterday but now back up to over .6450.
RBNZ won't like this...they're wanting our dollar lower.
Roger will be doing handstands come Monday as the NZD zooms back up to over .6600.
ASB economist Kelleher said yesterday there's over 1 billion dollars of 'positions' to be unwound shortly which will further lift the nz dollar. I guess that's what happens when of all the global pokies the NZD is the most popular for its size.
I think we should try fixing our currency to shake all the currency speculators.

... want business to borrow and invest and consumers to borrow and spend. In regard to the latter what has happened to the old fashioned premise “never a lender or borrower be”. Surely this is just encouraging consumer debt, debt and more debt. Or is this just too much commonsense for so-called economists to understand. Thank goodness I’m old and don’t owe anybody anything and have a very good memory of two world wide recessions and of my parents experiences as kids during the Great Depression. I’m afraid of where this world is heading. Maybe some astute commentator on this site Cld explain to this old woman where my thoughts are wrong.

'what has happened to the old fashioned premise “never a lender or borrower be”' This I inherited from my grandparents who lived through the great depression and parents who were born during it. However if I had got a rental as well as the family home 25 years ago I'd now have 2 houses debt free and a decent income off the rental, so who's the fool?

Steven I should have said with regard to never a borrower or lender be that that premise would exclude the family home, not many people cld ever pay outright cash for a house unless a Lotto winner or a very wealthy family. What I meant was the rampant consumerism that is encouraged by credit card debt, hire purchase, banks and finance lenders on “stuff” that we mostly do not need in our lives. I realise that the Reserve Bank is encouraging spending To help the economy but not at the expense of people being in debt up to their eyeballs. At the end of the day (God help me I sound like John Key) debt has to be paid back or we all go broke!

You are spot on Gin! The business cycles which create a healthy boom and bust have been banished by the central bankers manipulation of the financial system. Now all we have is debt debt and more debt with a solid belief that we can always sell at a profit to repay the bank.

House in my area sold last month for $250k below what they had paid for it! add on agents fees of $70k and the external paint job $40k and you're looking at a serious loss! At the last count we had 5 mortgagee sales ongoing and this is an affluent area in Auckland.

"But if the RBNZ wants businesses to borrow and invest, and consumers to borrow and spend, this won't happen unless savings and term deposit rates fall."

Well I may withdrew the large ( large for me ) amount of funds my wife and I currently hold in cash and lend it to our eldest child to pay down their mortgage ( in one case ) and help the other two get into the housing market , it makes no sense whatsoever to accept these abysmally low TD rates .

Or I may invest it in an emerging market such as Standard Chartered money market fund in Singapore where the cash rate (overnight rate ) is 100 % higher than here .........

If you lend to your kids at say 1% below the mortgage rate then that has to be a win by cutting out the middle man's (bank) huge slice. Of course I assume you will then be declaring that as income to the IRD so you can pay tax on it, wont you. The Q is then how do you deal with the risk of loss for existing child, let alone lending to the other 2 at the height of the market which shows signs of a drop. So who will take the loss? you? your kids? or the bank?

good luck.

It would be nice if media sources could make it a bit clearer that business is not given luxury of borrowing ("investing") at same rate mortgage holders do. About 3 times more probably. Plus banks prefer lending to home-buyers as its safer.

Indeed, this is why finance companies exist. Banks wont lend to small businesses so small businesses have to go and lend off the finance companies are way higher %s. Such a high % means that it can make no sense often to borrow as the only one profiting is the finance company and maybe their investor(s).

burn baby burn......

Surely, businesses only invest when they see a future demand and return. If consumers are not spending (more) then there is no point in investing. If you want to make the economy thrive you need all people participating, that means reducing in-equality. However while the cost of housing is taking way too much of (especially lower income) ppls money away and wages not increasing that isnt going to happen. You can grow through debt but that is / was a short term fix that is now played out. Quite why the bank continues to try and shovel poop uphill when it hasnt worked for a decade must be a sign of madness.

But if the RBNZ wants businesses to borrow and invest, and consumers to borrow and spend, this won't happen unless savings and term deposit rates fall.

Isn't it the case of banks declining to lend in a deflationary environment and lower rates reflect that conservative practice?

The whole world has an interest rate problem – starting with the fact everyone still calls lower rates stimulus. Eurodollar futures aren’t suggesting a high probability of renewed ZIRP because of some convoluted R* theory (which conveniently would absolve monetary policymakers of twelve years of failure and incompetence). Investors are betting on constant liquidity risk, or the same thing which is driving European bond yields further and further underground.

Global interest rates, global money. Take it from here Milton Friedman:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die. Link

Personally I don't think savers should worry. Rates are now 3% on a TD of 6 months or more with an OCR of 1% so how much lower can they go ? I would suggest that even an OCR of 0% will see them at 2.5% and if it gets to this stage then people will have more to worry about than low returns, the country will be in the toilet. Go Labour ! genius.

I save for my future. How do I protect my savings from people that think like yourself and Adrian Orr?