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Bernard Hickey calls on governments of all colours and sizes to bear down on prices so the Reserve Bank has lots of 'mates' during this tightening cycle Monetary policy needs mates

Bernard Hickey calls on governments of all colours and sizes to bear down on prices so the Reserve Bank has lots of 'mates' during this tightening cycle Monetary policy needs mates
The Government and local government needs to bear down hard on their fees and charges, says Bernard Hickey

By Bernard Hickey

There's nothing like an actual interest rate hike and the promise of many more to focus the mind.

There'll be home owners and business owners hammering their calculators and spreadsheets hard this weekend to work out what the Reserve Bank's decision and forecasts mean for their budgets.

The bank increased its Official Cash Rate (OCR) by 0.25% to 2.75% and forecast it was likely to rise another 2.25 percentage points to as high as 5% within three years.

The speed of the increases might surprise a few people. Some economists are predicting the bank could increase the OCR three times to 3.25% by July.

Many will scramble to fix their mortgages for two or three years at somewhere close to 6%.

Anyone on a floating rate around 5.5% will find this attractive.

But don't be surprised if a flood of fixing pushes up rates ahead of borrowers as banks are forced to dive into wholesale markets to cover these fixed rate deals.

This could create a type of 'bow wave' that pushes up fixed rates so high that it may even make sense to stay floating.

Either way, the prospect of rising interest rates has already had an impact.

The Reserve Bank noted this week its speed limit on high Loan to Value Ratio mortgages had moderated house price inflation to the point where it said prices actually fell in seasonally adjusted terms in January.

But the rise in fixed mortgage rates late last year was also a major factor.

More rate hikes this year and next year will dampen the animal spirits in the housing market.

The prospect of rate hikes has also dampened the export sector.

News of the Reserve Bank's more aggressive rate hike track pumped the New Zealand dollar up to near a one-year high of 86 US cents late on Thursday.

It boosted the currency to a record post-float high of 80 on the Trade Weighted Index.

Those exporters not able to benefit from record high dairy prices are feeling the pain.

The Government's aim of boosting the export sector's share of the economy from 30% of GDP to 40% of GDP by 2025 looks increasingly aspirational rather than achievable.

So it's doubly important for anyone near the levers of power to do everything they can to help the Reserve Bank avoid steep and fast rate hikes.

That means monetary policy needs mates. Both parties have pledged to run budget surpluses if they are elected in September, but that's the least they can do.

The Green and Labour parties are rightly pressuring the Government over power price increases that are still running much faster than inflation.

There have also been a swathe of indirect tax increases on fuel and tobacco that have added to inflation rather taken the pressure off. Central and local government fees and charges have been rising at an annual rate of 3.5% to 4% for last 18 months.

Any new government or council should be bearing down as hard as they can on those fees and charges to help the Reserve Bank, and therefore help save those households, businesses and exporters from the pain of big and fast rate hikes.

Any new government, regardless of flavour, should also be doing everything it can to help boost supply of houses, skilled labour and competition to bear down on inflation.

That also means strengthening the power of regulators to restrain or force down monopoly pricing.

The more mates the Reserve Bank has the better.


This article was first published in the Herald on Sunday. It is used here with permission.

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5 % is not high , Bernard ... our OCR's have been far higher in previous business cycles ...


... there's champagne corks ( Chardon of course ! ) popping around the country as savers , the long forgotten prudent folk , collect a tadge more interest on their collective $NZ 120 billion pile ....


I know , big guy , you think anyone with cash saved is a " hoarder " ... but Gummy reckons we need to encourage some degree of thrift , and to discourage rampant speculation in the stoopid housing market ...


... as far as I can figger it out , Mr Zz , the savers have most of that munny in term deposits at one of the big banks ... who then loan it to folk to buy houses in Auckland ... thereby further inflating the housing bubble ...




... gosh darn it  ... it's all the savers fault  !!!!!! .... and Hickey was right after all ..... double damn !!!!!!!


I think Chairman Moa gave a simple anaolgy that I elaborated on to explain this situation.


Years ago someone explained

Years ago someone explained the way RBNZ adjustng the OCR  is like driving a car; you see the road ahead and adjutsing your gear and change speed accordingly - that'd be the most economically and safest way to drive.  Or you can drive the car and change gear/accerelation as it runs out of power, or you can see how the road was by looking at the rear view mirror as you are driving along! ....

With my reply being.

I think the car driving analogy is quite good for how the Reserve Bank behaves. I think it would have been possible for government to have built a 'straighter road' by changing the housing market regulations so that the private sector supplies the market more elastically. Thus we would not have these supply constraints and price bubbles.


When replying to Chairman Moa I was thinking in the context of the housing market but Bernard is quite right, there is a bigger picture of reforms and vested interests that could be taken to make prices more competitive and therefor lower inflation. In my analogy to make the road straighter.


It should be noted that our system of monetary policy is taken from Germany where it has been successfuly used for fifty years until the current euro experiment. Germany also has mechanisms to contain housing inflation and ensure competition throughout there economy (they have had no housing booms or busts since WW2, while the UK has had three).


I wish this was the theme of Cunliffes speech, because that is the direction NZ needs to go and is the weak point of our current visionless government.



Read the posts around this one to understand why I think we need to invest in infrastructure to bear down on prices and assist the Reserve Bank.


It is for this reason that I think that infrastructure should be next political battleground. Not tax cuts or social welfare spending.



I think there is a lot in this. Monetary policy as it stands, run by central banks allegedly independent of political pressure, has been regarded as a bit of a success story.

But when the system was designed and set up, there wasn't any problems with highly inelastic housing supply that would make the central bankers job impossible.

Don Brash predicted all this while he was RBNZ Governor. He could see it coming because of the way Councils had captured RMA processes and were stuffing up housing supply elasticity. 

It is taking the mainstream monetary economists around the world a long time to wake up about this. There are encouraging signs. But I am coming round more and more to believe that there really are "capitalist" elite gougers rigging everything to enrich themselves and their mates at everyone else's expense. I've got no time for conspiracy theories about world takeovers, the Illuminati, etc; however it does not require a conspiracy to explain capitalist rentier behaviour. Housing supply is such a basic, simple common sense matter. All the unreason and smokescreening about it has to be getting pushed and promoted and funded from somewhere. 

Free markets are the antidote and have been deliberately miscredited to create opportunities for rent-seeking and gouging. I have recently come to accept the claims that big financier families rigged up crises of money in the late 1800's specifically so they could use them as a pretext to institute Central Banking and Fiat money - an ongoing means of their biggest gouges of all. 


Speaking of free markets being captured, this cropped up in my weekend reading on the U.S. Meat industry.


I think the whole western world needs to go through a period of cartel and monopoly busting.


The way I see it, a decadent elite has formed that has taken over from the hard working creative entrepreneurs of the past. They have a massive sense of entilement, believing they are the 'wealth creators' and hence should be rewarded accordingly. But they are not wealth creators their skill set is greasing up to the law makers and restricting competition, ensuring natural monopolies and public services serve them not the wider public.


They are a cancer on society, not only do they effectively 'tax' or transfer wealth from the 99% for their enrichment but they prevent any proper governmental reform of public institutions that would serve the 99% better.


If this all seems like conspiracy sort of stuff read the below and think who is working hard and who is benefiting from the resulting wealth creation.


"A nursing colleague rents in Halswell. He has worked himself out of Zimbawe through brains, good character and diligence. Obviously he has little in financial backing from family. He has been renting a 3 bedroom home in Halswell for his young family. They are now well established in the area, in particular the kids are doing well at the local school.  When they first rented it cost $280 per week. Then a few years ago it was increased to $360 a week. A month or so ago his landlord sold up making a very healthy capital gains profit. The new landlord increased the rent to $450." (Taken from The net effect of NZ's )


Sorry,Hugh, you really been and done it this time.

Too much waffle for me to get through.

Now if you were in Auckland, how would you explain the To Let signs if there is a true shortage of housing? I accept that there is overcrowding at some levels. I also note the number of seemingly empty houses. 

So it is something else and I suspect that speculation whether it is local or those pesky overseas moneyed drones is a more substantial cause. Right now those clowns in our Gummint are the real reason by neglect or by deliberate fostering of these creeps.

Further this loose cash keeps the exchange rate much higher than it would otherwise be.

That all suits Key and co in order to get re-elected.

Watch this space when all that cash wants to exit !!!!




That is all beyond Wheeler, I suspect or at least in his "too hard" basket







Hugh - I for one appreciate all the time you put into this but I would advise against getting distracted by high home building costs. It's the number one argument I hear for why our house prices are as high as they are - whereas as you are well aware it's our high land prices that is the core issue. Yes, home building costs too much, but so do many things in NZ. Why is it cheaper for me to buy a book online and have it individually packaged and delivered to my home than for me to buy the same book at Whitcoulls? Bring down land prices and all goods will get (a little) cheaper. Solving the high land prices is a much easier problem than our non-competitive market for goods.

Did you see that Len Brown is pushing for more revenue sources? My solution - a GST kick-back on every new build. Or, if that's a dangerous precident, a $15k (=$200k*0.15/2) infrastructure grant from the government for every greenfield new home. After all, that's about half of the revenue they will receive from the GST from the new build. That should motivate Len to free up some land.


Thanks ZZ. I think us Southerners don't really understand the urban planning challenges of Auckland and I would say you Northerners don't really get how big a challenge we have in Canterbury rebuilding NZ's second biggest city.


I think the obvious answer is to decentralise funding and responsibilty for this away from Wellington and to the regions concerned. Kiwis think this is a radical even impossible solution but really it is a commonsense tried and true practice in the majority of the developed world.


I think the Supercity Majoralty would need to be reformed as Len Brown is as decadent as they come and has set himself up in a self serving little political fortress. Even left wing commentators such as Chris Trotter are highly critical. Read Laughing-Stock city?


Councils should never receive the GST on land sales, construction costs fine though. GST on land would just encourage Councils to limit land supply to drive up land prices. Like a monoploy that would calculate the optimum amount they can increases prices to maximise revenues. It is also unfair in that big cities with higher land costs would get more money for new residents compared to smaller towns.


Otherwise Avatar I agree with most of your comments with the qualification that once competition is introduced into land sales it would increase competition in the building side of things like Hugh says. If builders could be confident there is a long term steady market they will invest in productivity improvements, such as Mike Greers factory built housing. Maybe we would get a competitor entering the construction materials market. That sort of thing.


.. a bit of a non-story really , landlords should be allowed to ask for whatever they want .... it's their property , not the tenants ...


If they ask for too much , no one rents from that particular person ...


.. Economics 101 : the law of supply & demand ...


Whose fault is it that there's not enough supply of  houses available for ownership and rental ? ... Bob Parker / Gerry Brownlee / EQC / Roger Sutton & CERA / the insurance industry /   ... 4 years on , and the city's officials are still flapping on about the building boom to come .. ... just aimlessly flapping their gums ...


As usual , landlords are an easy target for the malcontented !


The number of comments shows the depth of feeling regarding rent increases.


I like what Janet from Macrobusiness says in response to "NZ’s English ramps-up housing supply-side attack” article.


“…and to some extent government…” To some extent, Bill!!! YOU, as Government, are the one in tandem with your colleague Gerry Brownlee that oversaw the price increases in land and buildings after the Christchurch earthquake that saw those who had lost everything, or there abouts, have to pay MORE to re-establish their lives. Why? Because to have done otherwise; to have freed up adequate parts of tens of thousands of hectares of land, the masses of it to the north, west and south of Christchurch, would have meant a general drop in New Zealand property prices. YOU, Bill, put the interests of yourself, your colleagues and established property owners above the interest of the displaced. “And to some extent government” Give me a break! Not ‘some’, Bill “To the FULL extent, Bill – The FULL extent” YOU could have done differently, as only a national Government could, but you didn’t. An today we have the mess that is the New Zealand property market. It WILL end badly, Bill. And it could have been all so different. ( as Hugh Pavletich, for one, has beaten himself black and blue in the face for years, trying to tell you) All the tinkering about by you, now, and the RBNZ won’t change where the market is off to. YOU are too late."


The buck has to stop somewhere and in our system of government it is with the PM and Cabinet.