'It's all about Bollard's 'ifs''

Opinion: Interest rate outlook all about Bollard's 'ifs' - global situation not tanking, and NZ recovery firming. And quit this NZ safe-haven talk - that's Aussie

28th Jul 11, 11:04am by Alex Tarrant

<p> Alan Bollard's OCR outlook is cloaked in caveats.</p>

By Alex Tarrant

So here’s what’s going to happen.

Bollard is going to hike the OCR by 50 basis points to 3% on September 15 IF global financial events don’t take a turn for the worse, and IF economic data in New Zealand doesn’t turn back from its current upward trend.

Then he will leave it on hold for the rest of the year and probably a bit into 2012 unless something totally amazing happens like New Zealand wins Big Wednesday.

Sure, some pretty big caveats, especially the global situation one, but there’s not much we can do in influencing outcomes over there. We could try sending Don McKinnon over to help the Americans and Europeans with their negotiations, but I don’t think finance is his strong point. Keep an eye on Bernard's Top Tens - we know the Finance Minister certainly does.

And if Europe tanks badly again, or if the Americans default for the rest of the year or something horrible like that, hey, we don’t have a zero official cash rate – he’s always got an insurance cut up his sleeve and we know now he’s not afraid to use it.

If, in-between now and September, data releases are not all pointing at the NZ recovery staying firm, one thing that could help him wait until October is the June quarter GDP figures due on September 22, while the MPS will be on September 15.

But the Reserve Bank, with all their spreadsheets and modelling would be pretty confident they have a good gauge on domestic activity before Stats NZ makes its big announcement.

The New Zealand dollar will stay high for a while. We’ve got billions of reinsurance dollars still coming in to the country, and, despite dropping slightly, commodity prices are still at record highs (and any exporting company who banked on them not coming off AT ALL at some point probably needs a new financial officer and a change in economic forecasting agencies).

Plus, everyone loves Australia at the moment and all this talk of New Zealand being a new ‘safe-haven’ is because our economy is so entwined with our Tasman cousin.

Hell, half of global currency traders probably think we’re just another Australian state anyway, with different pictures on our notes and coins. Basically the thinking is, “hey Australia looks a better bet than the US at the mo, and seeing as we learnt in Finance 101 to diversify our portfolios, let’s put some in that place underneath it – what’s it called? Antarctica or something...?”

So if those two big ifs Bollard referred to happen, and the dollar doesn’t come off, I’d say expect your floating mortgage rate to be going up 50 bps in September, possibly October (but unlikely), but then staying at that level until maybe March (or however you view the short-term – this could be up to a year), when Bollard’s first MPS press conference of 2012 will be.

If those two big ifs happen.

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13 Comments

by Andrewj | 28th Jul 11, 11:23am 1311808992

if, he still gets the 500k+ salary whats he got to worry about, just hang in there.

by philthy | 28th Jul 11, 11:46am 1311810370

If leaky home owners can make a claim on their houses losing value, can savers make a claim with the government for destroying their savings by running up inflation at 6%? - while still being taxed on their "profits".

by steven | 28th Jul 11, 12:34pm 1311813262

sigh.....it isnt 6%...its really 3.2 or 3.3% when you remove the one off that is GST....plus its CPI which is volitile...

Leaky homes losing value is a specific event with a specific legal outcome from a performance failure.....If I bought a computer and it failed at 18 months because of bad workmanship I can claim under the CGA....I cant claim a loss because a better one has been released devaluing yours, which you seem to want to claim.

If your savings lose value because a professional put it all into say Hanover and its was obvious Hanover was going bust, then yes you would have a claim aganist the professional.

And finally Govn's have a duty to ensure the well being of NZ overall IMHO, this doesnt mean one sector (savers) is protected against the ravages of inflation at the expense of others...(workers and businesses)... Simple if you want a higher income look for investments that return a higher income, beaware of the risk you now run of course.

I have little time for ppl who whine that the deposit rate is too low when in effect its a risk free rate of return while in a recession risky returns are paying little better. There are business ppl and investors out there taking a risk compensated with, if they are lucky a fair return. this is what an economy is about not sitting on your butt at no risk and whining.

regards

by philthy | 28th Jul 11, 1:42pm 1311817333

What??? you can sign all you like, it doesn't matter why it's 6% it's still 6%, and represents that much less purchasing power.

I'm not saying next year will be 6% as well, but this year is definitely 6%.

I have little time for people that think borrowers are the be all and end all of the economy.

Ever wondered why we are one of the most indebted countries in the world, with very low productivity and low wages? when you constantly run high inflation and just look after people that want to buy houses that's what happens.

by steven | 29th Jul 11, 7:18am 1311880720

No its 5.3% CPI not 6%......while core is still at or below 2.5% which is the one to watch.....and Ive been saying this a long time.....

Purchasing power, depends on whats being purchased....some things cost more some less.

Borrowers, neither do I, but frankly I have no time for whiners who complain they dont get enough interest by sitting on their butts with their money in a deposit account all the while our economy is struggling to stay afloat and businesses need investment.

Ever wondered? yes one of the reasons is because savers save badly, they dont really participate in the economy they sponge off it, work for your income.

Low productivity is linked to low wages, NZers actually work some of the longest hours which means in effect unpaid work which should mean good productivity....it doesnt, why? well one reason is employers failure to invest in plant that improves productivity per person, instead we take on more cheap staff....Though from reading over the last year r 2 I wonder if productivity is a crook of sh*t I think its distorted by the finance industry which we dont have. I could write quite a bit on this, might do later, its huge can of worms.

Constantly run high inflation, rubbish frankly....

Look after ppl who buy houses, actually I think it was actually a hands off attitude and a big mistake, but thast what voters wanted, to make money for no work....

regards

by natman4 | 28th Jul 11, 1:43pm 1311817384

interest rates should be set by the market, this would make borrowers think about what they are doing, easy money is not good for anyone, and savers are definetly been punished for doing the right, low interest rates just steal from one sector of the comunity to give to another.

by Kiwialan | 28th Jul 11, 2:33pm 1311820436

Ever seen a "free market" exponent advocate a free market for interest rates. No way. That is the one thing they need to be controlled by their mates.

by meh | 28th Jul 11, 1:44pm 1311817473

@ Steven 12.34pm

"it isnt 6%...its really 3.2 or 3.3% when you remove the one off that is GST"

At what point do we stop discounting for the GST increase?

"And finally Govn's have a duty to ensure the well being of NZ overall IMHO, this doesnt mean one sector (savers) is protected against the ravages of inflation at the expense of others...(workers and businesses)"

But isn't one sector already being protected (borrowers) at the expense of savers? Also, aren't most workers being hit by inflation and wouldn't they expect their savings to help them out in harder times?

The investors you talk about that are taking risk are most likely investing in commodities/shares and not creating productive businesses all the while sitting on their butts.

by Alex Tarrant | 28th Jul 11, 2:44pm 1311821090

GST increase was from the fourth quarter last year (October 1). So CPI figures from the fourth quarter this year would mean that extra 2.2% from GST going up would not affect the headline figure.

The annual increase in the March quarter this year compared prices after the GST increase (March 2011 qtr) with prices before the GST increase (March 2010 qtr).

So from Q4 figures this year we'll be comparing apples with apples (prices after GST inc vs prices after GST increase)

And the RBNZ and Treasury are expecting annual CPI increases to fall down to somewhere between 2-3% when that happens.

Cheers

by Sepherial | 28th Jul 11, 4:40pm 1311828017

Classic econobabble!

Its nonsense adding and subtracting this and that from this date to that date on some flawed index!

Its quite simple stuff - The end result is that you pay more for everything!

by steven | 30th Jul 11, 7:35am 1311968132

No you are working on increases its per year...by your logic in 1917 a Dollar then is now $150 so oh look at the inflation!!!! rasie the OCR to a million% quick!!!!

regards

by Sepherial | 30th Jul 11, 11:18am 1311981492

Nope not even close couldnt give a frack about all the technical numbers bs index comparisons, 1917, or a million% ocr or the ocr, gdp = all econobabble

Yea ill ask for the core rate on the next power bill...

When all is said and done at the end of the day after the econobabble...

we pay more

simple stuff.

Cheers

by steven | 30th Jul 11, 8:15am 1311970532

I think Alex has answered the GST thing, but also CPI is volitile so you set the OCR on core inflation which is currently at < 2.5%. Example this mont tomatoes are $8 a kilo, last month they were $14 a kilo....you would have to be insane to try and set a OCR based on the tomato price, ditto CPI, its biased, and seasonal.

Lets make a distinction here, there is a difference between savers and those living of their savings....So I try and save, but Im also a debtor (I have a mortgage) I save for a rainy day and my retirement and I over-pay on my mortgage. So what happens when rates rise to me? I save less or pay down debt slower. While those on savings are drawing them down and are better off. So in actual fact I as a SAVER I am punished by high OCR as I can save less.

As a worker I got a 1.8% pay increase...then I pay tax so its really 1.2% and then core is 2.5% or CPI is 3.3%, and Im lucky with the 1.8%, many ppl I know got nothing, are working 4 out of 5 days a week or have lost jobs and the new one pays less........Meanwhile those with deposit savings get 4.5%, so get 3% net.....and do what work for it?

Further, savers v mortgagees for a moment....go back 4 years the OCR meant the floating was 10.25% (I think it was) that was good for savers / OAPs wasnt good for me when I came off the fixed rate....but I could see this disaster coming and I waited 6 months....look at the drop taht resulted, so far Ive saved over $5k.....and I think its another 3 to 5 years minimum of this....so $10k better off.

Those with savings should consider that businesses are struggling and not just them. Ive talked to several one man bands over the last few months and they say the same thing. Where there is work its even harder to get paid for it. One said now he spends 1 or 2 days a month hand delivering the invoices on the day they are supposed to be paid and asks for a cheque there and then. Otherwise 90days and a lot of hassle isnt uncommon.

Investors on shares , actually no Im not, but at least they are trying to make thier money work for them. My god father is 70, he retired at 55 and when into share trading as a "hobby". He tells me he's made more money in the last 15 years than the 15 before and he was a very well paid senior engineer at British Gas. Hell I made easily double my money tax free when I sold all my shares last year....and I paid no tax....

Business investing...I agree with you here and hence I think that the CGT on shares is essential, if I have to take a risk with a business and pay tax v shares, well without CGT im taking shares (which is what I used to do). We also need to look at how we make it simple, painless and understandable for mom and pop investors to invest in small NZ businesses. In effect putting your money with Marac(?) did that....so thats one vehicle, which obviously failed somewhat. Now that seems to be down to dodgy ppl and no or poor rule enforcement, so Im all ears for a method to fix that.

Finally a OCR that is too high, or other mis-step could plunge us into another recession which I think will carry on into a depression...so right now Dr Bollard is playing a very hard game IMHO...and we are doing well by him....thank god Brash still isnt there is all I can say.

regards