Roger J Kerr applauds the introduction of new tools such as the core funding ratio and LVR limits, chides critics

 By Roger J Kerr

An old adage in the world of central bankers managing monetary policy is that if all sectors of the economy are equally grumpy, then the monetary authorities are probably on the right track with policy settings and conditions.

Some manufacturers and exporters are always unhappy with the elevated level of the exchange rate, while others see the exchange rate as a share price on NZ Inc and understand why it is so strong.

Now we have house builders and those in the residential property market complaining about the negative impact the LVR speed limits on the banks will have on the property market.

Of course the credit controls are designed to deflate an overly-leveraged housing bubble that caused the sub-prime mortgage crisis and the GFC in the first place.

Some sectors of the economy have very short memories.

The RBNZ should be applauded for its introduction of macro-prudential tools such as the core funding ratio and the LVR limits on the banks to ensure we do not have cavalier bank lending causing a property crash here.

The collateral damage on the wider economy from a property bubble busting is always more severe in New Zealand as many SME’s use residential property security to finance their business expansion.

For many years politicians and business groups have been calling for monetary policy to have some mates to take the heat of the export sector when interest rates are increased and the dollar goes up.

Now that we have other policy mechanisms to prudently control bank credit, lending and property cycles there are complaints that it is all too tough.

What has to be remembered is that short-term market interest rates will ultimately be set at a much lower level around 4.50% to 5.00%  than what would have been the case had we not had the macro-prudential policies alongside monetary policy.

Generally the local banks (with one blatant and surprising exception) have positioned their lending books and policies well ahead of the LVR controls that come into force tomorrow.

While the media focus on the housing market is understandable at this time, the reality of the NZ economy is that agriculture drives our destiny and record milk solid payouts in the dairy industry will be increasing dairy farming incomes by $5 billion this year compared to last.

Add on the increased construction and retail activity and there is no argument against interest rates increasing to contain inflation that comes with strong economic growth.

Borrowers, who were too slow or unwilling to fix interest rate prior to the increases in term swap rates over recent months, now have another opportunity to fix with US 10-year Treasury Bond yields pulling back 30 basis points over the last week.

An increase in US jobs during September by more than the forecast 180,000 on Friday will propel US bond yields higher again, so the window of lower NZ swaps rates may not be open for too long.

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com