Reserve Bank wary of households' sensitivity to interest rate changes in a tightening environment

How about some sensitivity towards non asset owners who haven’t received a sausage (apart from keeping their job, as Orr puts it).

No, it doesn’t mean that wealth inequality has magically increased. Those middle-income people who have a house have enjoyed in that wealth. Those people who don’t have a house have enjoyed in jobs.

I don't even have words.

Increased mortgage costs mean less spending money and upward pressure on rents. Now add in globally driven price increases and the imminent withdrawal of Govt fiscal stimulus (wage subsidy and resurgence payments). We had better hope that the price of oil, shipping etc comes back down quickly - or we have the perfect recipe for a demand crash.

The stupidity is caused by sheeple fellow kiwi. In the day and age of social media and communication, we are letting RE agents and media to take over our critical thinking. All buyers just need to get together on a forum and decide enough is enough. Just don't pay the big bucks and hold on. What you got to loose if everyone holds on for 6 months so and year and run with FOMO. You will see how prices will come back to reality.

We are a small country with 2 degrees Seperation and if one person tells the other, it will be revolutionary and we will have save our future. So just don't buy and see how prices will fall and be more realistic. Don't fight with each other at auctions. We are not animals. Think with human logic not your primitive brain where you have to compete to survive.

I guess even if a few listen, we can have a big impact. We are just making investors and RE leeches rich by doing what we are doing

“Can I note that it’s banks that make the lending…

So Orr is saying not to blame him for the credit creation to bid up the prices of a generally fixed housing stock, thereby destroying the value of people's savings and income. 

“So, we acted consistently to the extent that people have chosen to go off and do what they do. They need to interview themselves and have an interview with their bank.”

Once again, not his responsibility. It's all about the sheeple and the commercial banks.   

Good grief his responses are just dripping with arrogance and hubris.  The RBNZ clearly had a massive failure in predicting the impacts of its covid response, but he sticks his fingers in his ears and blames banks and borrowers for following the rules HE put in place.  Reducing LVR's was a mistake from the get go, as many predicted.  Initially lowering rates wasn't the issue, it was leaving them far too low for far too long.

People had jobs during the pandemic because of the government was paying half the countries wages, not because of of the RBNZ's ham fisted response.  But the really concerning thing is he has "no regrets" about the financial stability risks created and the inflation risks, because "people have jobs".  Labour adding maximum sustainable employment to the RBNZ mandate is one of the stupidest things they have done 

What a mess

Further retail rate increases are expected, as the RBNZ has signalled its intention to keep increasing the Official Cash Rate (OCR) from 0.75% to 2.6% by late-2023 - a level above what it deems to be the “neutral rate”, which is neither stimulatory nor contractionary.

Hmmmm... R* equates to the neutral rate in NZ.

From the point of view of orthodox policy, it has been the needs of monetary policy that drove everything lower and by extension upside down. The yield curve has only steepened in the 21st century, and yet the economy of this period has been slower and weaker (in sustained fashion) than at any point since the 1930’s. It sets up an inversion to where the yield curve gets steeper the more the economy slows, which by mainstream definitions can’t be the case.

To solve the “equation” we merely have to frame all references to the nominal. Thus, the steepness of the yield curve itself is a byproduct of monetary policy effects on the shorter rates. For policymakers that has meant R*, the assumed natural rate of interest.

We have to keep in mind that R*, or R-star as it is sometimes notated, is not something that can be observed directly, but despite that limitation is immensely important to monetary policy. It is supposed to define the balance between inflation and deflation; if monetary policy can get “real” rates below R* it is thought of as stimulative. Conversely, if the “real” policy rate is above R* monetary policy is believed functionally restrictive.

Given that framework, if R* is falling then each time the Federal Reserve or any other central bank wishes to “stimulate” it must do so with lower and lower short-term rates in order to get the policy rate underneath where it assumed the natural rate has fallen. Once at the Zero Lower Bound (ZLB), policy is constrained in nominal terms leaving authorities to undertake unconventional policies so as to push “real” rates down where they are calculated to be stimulative.

According to calculations performed by the San Francisco branch of the Fed, R* is indeed falling and has been doing so for decades. As a result, each time the US economy is confronted with cyclical economic weakness such as the Asian flu (which resulted only a near-recession) or the dot-com recession, the “required” monetary policy response has been that much more so. The result is what we see of the yield curve, where it steepens due to the weight of policy on the front end essentially pulling it downward.

But is this really true? There isn’t a whole lot of sense in this formulation. You can see at times that it amounts to reverse engineering rather than defining an internally consistent and logical explanation of the last thirty years, starting with the fact that economists have no idea what might have caused R* to decline in the first place. Further, the bond market just doesn’t work that way, as again interest rates define opportunity rather than being anchored almost exclusively to monetary policy.

A more common sense explanation would be the opposite direction for the chain of causation: the economy slows in structural terms causing the bond market to reduce in its overall nominal framing, where cyclical weakness is therefore more pronounced over time leaving the Fed not to “stimulate” with lower and lower policy rates but to announce in review what has already happened. In short, they are calculating a lower R* as a result of being unable to square reality with the orthodox parameters of how orthodox theory posits reality is supposed to be.

R* is just the plugline or balancing factor that attempts to make sense of why neither ultra-low interest rates after the dot-com recession nor QE in the aftermath of the Great “Recession” failed to work as they “should” have. For policymakers, policy rates went low and lower but since no great recovery resulted, especially from the QE’s, it is merely asserted that R* must have been that much lower still. From this view, QE was surely powerful “stimulus” but it didn’t appear to have worked, therefore R* was just that much lower than QE got the policy rate to. If “real” policy rates had been pushed down to -10%, the still lack of recovery would have left Fed officials claiming R* surely was -10.01%.

This reverse engineering is actually quite common and necessary for a philosophy that is so often backward. What comes first is the lack of growth, leaving economists to calculate an R* based on wherever interest rates happen to be due to their reactionary efforts trying (and inevitably failing) to do something about it. We can observe this relationship in any number of important ways:... Read more

Zollner acknowledges the sensitivity to interest rate increases (even moderate ones) given high debt levels (so, logically, mortgage holders are much more sensitive to say a 1% increase than they were with typically much lower debt 10 years ago) So she still thinks the OCR will go 2% plus?

I certainly don't. Demand in the economy will severely dissipate by the time it gets to 1.5

RBNZ has effectively painted itself into a corner , no matter how high inflation goes it is unable to respond rapidly only by 0.25 increments and those aren't likely to continue until February at least .

All mortgage approvals are based on affordability at a test rate (circa 7% I believe), so I wouldn't imagine that RBNZ are even remotely concerned about repayment affordability right now. If people are defaulting because the rate moved from 2.5 to 3.5% or whatever that indicates an issue in the banks approval process and shareholders/bondholders will just have to take a loss for wreckless lending.

It's pretty common for a recession to follow a rate hike cycle.  It's pretty rare that they get the rate 'neutral'

"Reserve Bank wary of households' sensitivity to interest rate changes in a tightening environment"

Is it really or ai just crocodile tears / concern otherwise, should they not have gone up when had opportunity to move by 0.5% and than in 0.25%.

Who is responsible for promoting debt.... is it not like Drug supiers raising concern of drug issue. 

"If things are getting too expensive you need to look at yourself and try harder."

NZD taking a tumble might have to raise sooner that February before currency sharks have a feed

He then said he strongly disagreed with the assertion very loose monetary policy had had a “catastrophic” impact on non-homeowners.

Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.

There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?

There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.

Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.

The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.

But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and

offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax. Link-pdf

Orr said, “Can I note that it’s banks that make the lending…"

Haha, I feel in 2 years time when we have a serious housing price correction, he'll probably use this phrase again "Can I note that it's banks that decide on their mortgage rates?" Hence why he is letting the banks take the lead for this round of rates hike. Pathetic!

Tough tits, if you take on debt you take on a risk that interest rates will fluctuate. Since when is investing only allowed to be upside only? What a coddled group of mummas boys this place is. 

For those that are interested, Kathryn Ryan will be interviewing Orr on RNZ at 10:00am.

https://www.rnz.co.nz/national/programmes/ninetonoon

He's not eloquent, is he?

"remember this was a period when the virus was brand new; vaccines hadn’t even been invented"

You can tell that it's not rehearsed, it's all so 'clunky' 

“I did not want to be providing stimulus with one hand and then tripping over our own [loan-to-value ratio] policy with the other"

"They need to interview themselves and have an interview with their bank"

Does this mean that he's not confident in what he's saying because he knows it's rubbish?

Question: Just how much control does the RB have over interest rates?  Can the OCR become meaningless as other drivers set the 'market' rates? 

Yesterday’s RBNZ decision described as “bird-brained” and “spineless” by Infometrics chief economist Brad Olsen.

Brad certainly not holding back – suggests the bank needs to act more strongly.

I tend to agree.

Is it just me of is the RBNZ guilty of causing most of the soon to be carnage, or extreme bank profit with their movements from the last 24 months?

The key takeaway is the nearly 70% of mortgages that are rolling over in the next 12 months. If rates keep increasing or even if they don't drop now from the current position this will really begin to bite in 2023. With energy prices still increasing and inflation high, 2023 could be a total shit storm. Seriously is anybody thinking about all these factors colliding just before our next general election ? I can see some never before seen in NZ street protests happening in 2023 by the disenfranchised youth of this country.

The RBNZ could insulate current mortgage holders from cash-flow harm (keep them solvent, in other words) by dropping the OCR to Minus 5% if it chooses, as long as it restricts the issuance of New Debt. That could mean the 'value' of their current holdings deteriorates as 'demand' goes unsatisfied by new debt, of course. But it's a trade-off.

This whole situation isn't about 'the price of debt' it's about 'the quantity of debt'. As Stephen has written on so many occasions, it's about the Risk Weighting that the banks are allowed to place on residential mortgage issuance. Fix that, and the interest rate becomes of secondary importance.

The last bit especially (where he is challenged by the Journo) but all of it has left me gob smacked because it really shows just how disconnected he is from reality.

Under is watch our economy has experience minimal inflation in most areas but in housing 10, 20% + making it significantly imbalanced, and having serious negative influences on other parts. In 2019 he told us they had stress tested the banks and found there was no issue if a 50% reset of house prices occurred (which proves he knew it was an issue), but now he is telling us he is concerned about the impacts of a reset, and that last year he wasn't concerned about the localised inflation!??????

“No, it doesn’t mean that wealth inequality has magically increased. Those middle-income people who have a house have enjoyed in that wealth."

I really don't understand this wealth effect. How is that wealth realised? Maybe if you sell and bank the capital gain but otherwise the "wealth" has an interest component to it that is now increasing if drawn against. Surely the net effect to society for any realised wealth effect is increased costs against it. One persons wealth is anothers debt. 

Jaw dropping. Just how detached from you and I is he?

“I have no regrets of anything we did last year". I welcomed Orr's appointment, but now can't wait to see the back of him. He knew perfectly well what the result of slashing the OCR would be and quite deliberately chose to do so. He expected consumers to use the "wealth effect" to keep the economy going by ........consuming.

Of course there was great uncertainty, but he could have chosen to be much more measured in his approach to reducing the OCR. I also find it hard to swallow his (mis) appropriation of Maori values and language.

Perhaps he and Collins should hold hands and disappear from public view.

The guy is clearly not accepting asset inflation is causing issues and saying what he has done is correct.

No point this is what it is, take it or leave NZ.

A journalist challenged Orr’s response, arguing it might be more constructive for the RBNZ to take some responsibility for soaring house prices, as borrowers have simply responded to the incentives put before them. Orr refused to engage.  

 

House prices leaped up - they lost touch with the ground - but it’s not my fault, says Adrian the Clown…

https://www.investors.com/news/inflation-rate-2021-us-economy-stock-mar…

https://thekaka.substack.com/p/dawn-chorus-orr-lacks-regrets?token=eyJ1…

Blatantly Arrogant with no remorse = Power Corrupts = Dictator 

Surely a study of economies that had house price crashes after the GFC should show Orr that NZ was getting into dangerous territory.

The dogs in the street knew what was happening in the last 12 months with the housing bubble being in the euphoria stage.

The banks and the sheeple cant be left to make the decisions when there is tasty cheap and easy money available they will choose greed of course.

There is no industry in NZ, milk powder can only go so far, the economy is based on debt, the recession will be tough but inevitable.

This article shows clearly that the RBNZ does not play favourtism nor succumb to the agenda of a minority group. Neither does RBNZ play into the dramatic manipulation plays of the mammoth market players or bank economists. It also displays the independence and macro-economic level in which the central bank operates.

If minority interest groups have issues with their special interests, they should go to their ministers in the government instead as they are really the ones whom are responsible for fiscal policies, national planning and budget allocation.

Keep barking at the wrong tree won't change an iota.

The RBNZ did it right!

Is it really possible to be employed as the RB governor when you don’t comprehend economic cause and effect ???? 

Remind me who appointed him????????

I'm afraid to say that Orr and his advisors ..if he even consulted them has proven to be incompetent .....he could easily  cancelled some of the "printed money" and stopped the outflow of the cheap money from all the commercial banks and thus the rush to invest in housing.

Its Time we get rid of the Babyboomer policies of the past, greed before people and focus on policies of their parents.

Im a house owner, but this is not fair.

The young need to step up, and people should vote them in.

Pension Asset Test all assets, Tax the hell out of the asset wealthy whom have done well from these unfair babyboomer policies of the last 30 years and introduce a UBI for everyone.

Return stolen money back to the youth, their children and their childrens , children they need it more now than the Babyboomers.

and stop working for families most people on the street don't have children or families.

Single people without children matter too.