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Christopher Luxon’s Coalition Government wants to prove it's serious about inflation

Public Policy / analysis
Christopher Luxon’s Coalition Government wants to prove it's serious about inflation
Prime Minister Christopher Luxon poses for a photo at the Coalition Government's first Cabinet meeting in November 2023
Prime Minister Christopher Luxon poses for a photo at the Coalition Government's first Cabinet meeting in November 2023

For the past two years, the most important issue for New Zealanders has been inflation. 

It’s easy to see why. The consumer price index has increased by more than 17% since inflation exploded out of the Reserve Bank’s target range two years and five months ago. 

Households have faced an even larger increase to their cost of living than that headline figure would suggest, since it excludes mortgage repayments. 

Statistics New Zealand’s living-costs price indexes, which does include interest payments, shows the cost of living has increased more than 19% for the average household.

It’s important to note that wages have risen as well but only about 16%, which means people are still out of pocket. Plus, people likely feel they earned a pay rise and should be better off.

This is the number one reason the Coalition Government was elected. Not because of Treaty issues, ‘woke’ United Nations agreements, Māori words on street signs, or whatever else.

Prime Minister Christopher Luxon knows this and wants to show the public that he is deadly serious about halting the increasing cost of living. 

And so, the first legislative action of his government will be to remove the part of the Reserve Bank’s mandate that tasks it with targeting maximum sustainable employment.

This is largely a symbolic move, as it won’t result in lower inflation, but lots of things governments do are about signalling some sort of virtue. It doesn’t make them worthless. 

Few economists think simplifying the mandate would have any impact on monetary policy during this cycle, but many support the change anyway.

Bevan Graham, an economist at Salt Funds, said returning the central bank to a sole focus of maintaining price stability was a “welcome development” for two reasons.

First, the dual objectives could clash in some extreme circumstances. It would not be clear what the bank should do if inflation and unemployment were both high, for example.

This is an unlikely scenario, as employment levels and inflation are closely correlated, but one can always dream up a hypothetical economic shock that would cause it to happen.

“The second and more important reason is that central banks lack the tools and direct influence needed to affect employment outcomes,” Graham said. 

“Employment is influenced by a complex interplay of factors, including fiscal policies, labour market dynamics, and broader structural issues”. 

Outcomes in the labour market will always be important for the Reserve Bank, but it only controls interest rates and the money supply — tools best suited to maintaining price stability. 

“The reality is there are a multitude of other government agencies that should be taking responsibility for labour market outcomes,” he said. 

Know who to blame

It would also shift responsibility for employment onto the Government and force them to confront policy settings that could be contributing to bad outcomes for workers.

The Reserve Bank itself suggested arranging its objectives in order of importance, so that it could have clarity on how to act if they did come into conflict. 

So, changing the central bank’s mandate does minimal harm and sends a strong signal that the National-led Government wants inflation under control — an easy win for Luxon. 

The more difficult test will come at the Half Year Economic and Fiscal Update, before Christmas, and at the Government’s Budget in May. 

Here Luxon and his Finance Minister, Nicola Willis, have to make good on their promise to not add to inflation pressure while still cutting taxes and improving outcomes in public services.

The Prime Minister talked a good game at his first Post Cabinet press conference on Monday, saying he was determined to get fiscal and monetary policy working together. 

“[Governor Orr] can only go so far if we don't have our fiscal situation sorted and under control. That's why we need to go through government spending with a very big focus on that,” he said.

On Wednesday, the Reserve Bank warned the Pre-Election Economic and Fiscal Update added more pressure to inflation than it had expected when looking at the Budget update. 

The implicit message to the new Government was that if it wants to help avert another Official Cash Rate increase, it will need to deliver a much tighter set of books than that — a tough job. 

D.O.A?

One final thought: National’s coalition agreement with the Act Party promised to seek advice on several other changes to the Reserve Bank’s mandate. 

Such as making the Governor the sole policymaker, setting time targets for achieving the inflation target, and removing the Treasury observer from the Monetary Policy Committee.

The first two changes go against international best practice, so officials are likely to advise against them, while the final one has mixed opinions. 

Since the Government is pressing ahead with legislation to change the mandate before seeking any of this advice, you have to wonder if those other changes are dead on arrival.

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120 Comments

Thats it in a nutshell.

Changing central bank mandates or administrations isnt going to alter any of that.

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4

Exactly.  I'd love to see that bar graph repeated for NZ.  My guess is that housing would be the highest percentage increase since 2008 here.

Yet this government has absolutely no policy whatsoever in that regard.

 

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12

"Yet this government has absolutely no policy whatsoever in that regard."

Odd comment from you, Kate. You've commented frequently on how their policies are going to make housing affordability worse. Comments I agree with.

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1

What I meant is no GOOD policy that will ease price pressures - you are right, affordability will worsen.

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8

What I meant is no GOOD policy that will ease price pressures - you are right, affordability will worsen

If you believe that inflation is largely a monetary phenomenon, it's quite clear that NZ has a problem that no govt is going to tackle. Private banks are responsibly for approx 97% of the money supply. If your nation's economy is addicted to the property ponzi, you have a massive issue to deal with.   

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8

No kidding.

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3

Probably much bigger than people realize. It's way beyond my bandwidth. All I know is that without more credit creation, it can't go anywhere. 

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0

How do you keep an addict off their poison when they have a legal way of making it themselves and by doing so they get richer?

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2

Do remember that house prices increased around 100% under Helen so definitely since before 2008. 

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4

And how does that make Key/Luxon et al, look better? 

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1

Do remember that house prices increased around 100% under Helen so definitely since before 2008. 

Her understanding of the issues related to money supply and houses was dreadful.  

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1

Thankfully Cullen was a near genius (in political realms) on such issues.

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0

To be fair that was when the symptoms first started to show, and easy to point the finger in hindsight.  With the benefit of hindsight, both Key and Ardern governments failed to tackle the issue.  

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1

The previous government were a Total joke on housing. What a debacle

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10

Feed the Rich: UK Pours Over $100 Billion a Year Into Top 1%

Same in NZ?

Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households

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10

HouseMouse: "The previous government were a Total joke on housing."

Really? NPS-UD. MDRS. Encouraging investment in new builds and away from existing housing. 

Please do explain how you got to your view. I consider it a nonsense.

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19

Plus brightline test, interest deductibility for new builds, foreign buyer ban. 

They were very good on housing. 

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21

It wasn't the previous government's fault that the RBNZ drove interest rates basically to 0. That's what caused the spike in house prices.

 

Kiwibuild was a failure, but they made a number of policy changes that would have made housing more affordable over the long term.

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10

Yet prices fell considerably... why was that?

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1

Purchasing power Is what counts, and It's decaying - hence socializing losses.

How a developer held the Government to ransom for a $37.8 million bailout

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6

That's a huge reason for inflation. Would have been cheaper to pay the 56 home buyer's $100k and get them out of the way and then bust the morally bankrupt developers and go after the directors. Then buy up the remnants.

We have developed this bailout culture to a high degree and it's costing us big time.

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21

Agreed. I read that article on $tuff earlier today & that was exactly my response.

Other peoples money = moral hazard 

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5

Didn’t have much of a clue about anything to do with commerce did they. Wonder which consultants gave them that advice and how much they paid for it. That really sums up the problem in so much if you haven’t the capability to work it out for yourself, odds on you then haven’t the capability to understand if advice received is reliable and viable.

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3

Probably more concerned about the saliva splattered walls of Hosks microphone booth if they didn't throw money at the monied. Sensitive lot the red team.

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1

Wonder when this decision was made.  If during the period of the caretaker government, they would have had to consult National before pushing 'go' on the land swap/deal.

 

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0

The article is suggesting the 6th of October so ahead of the election.

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0

Changing the reserve banks mandate makes HFL incrementally more likely, which makes the cost of living worse.

 

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3

It’s not inflation that’s the issue. It’s Competition and the lack of it.

Increased competition helps everyone across so many markets. 

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5

Was retail cheaper when there was a large amount of smaller players?

If I'm buying 10s of something I'm going to pay more than someone buying thousands of them.

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re ... "It’s Competition and the lack of it."

It is NOT that black and white. Never has been. Never will be. 

When Competition enters a cosy market with a small number of entrenched players earning healthy profits = Competition Good!

When Competition enters an already highly competitive market where suppliers are all struggling to make profits = Competition Bad !!!

A case of the former? Banking. Case case of the latter? Builders. (With building products suppliers being a case of the former.) 

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2

The previous government insisted NZ’s problems with inflation were mostly imported. In so doing they denied the impact of the policy of a crash dived interest rates, encouraging NZrs to borrow to spend and the RBNZ wilfully printing money for the government to wilfully spend. Subsequently the inflation rate has peaked and retreated slightly but it remains as too high and is sticking around. The new government obviously has a challenge and may yet resort, as other nations have done in the same circumstances , to a measure of austerity. That won’t be popular to say the least.

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9

The previous government insisted NZ’s problems with inflation were mostly imported.

Imagine if they said the most important factor related to inflation was the price of money or servicing debt. They can't because once people cotton on they would ask why the price of money has been suppressed for so long.

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This is the number one reason the Coalition Government was elected. Not because of Treaty issues, ‘woke’ United Nations agreements, Māori words on street signs, or whatever else.

With respect Dan, that is largely EXACTLY why this government was elected.

It was a vote against Labour and their arrogant, virtue-signalling, woke, racist and divisive policies that Kiwis were absolutely fed up with that led to their evisceration on election night.

Likewise, they are fed up with the woke, virtue-signalling media that has been so complicit in the previous government’s actions over the last few years.

People yearn for the largely harmonious country we all grew up in (or immigrated and assimilated into) not so long ago. That feeling of being or becoming a Kiwi.

Inflation is certainly a concern for many but to suggest that it is the main reason they voted for the current government as if they could somehow wave their magic wand and wish it away, is about as fanciful as many of Labour’s other policies.

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29

Swing voters decide elections. Swing voters are middle-aged home owners who always vote for the opposition when house prices are falling and / or they can't afford to buy as much stuff at the shops. Every change of Govt in the last 40 years has happened when house prices have been falling and (typically associated with global economic downturns).      

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9

The left didn’t actually lose by that much, it could quite easily be a result of inflation and high interest rates. Not many governments get voted back in when the economy is doing badly regardless of whether it is their fault. 

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5

I agree those were big factors.

I am a pretty liberal guy when it comes to matters such as sexuality, Maori rights etc. But even I was sick of how far things had gone. And I know a lot like me. Very far from red neck territory!!!

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27

Or perhaps not quite as far as you'd like to think.

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18

Yep. Kiwis I general don't like to admit how conservative they really are. 

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8

A local school has had to install a litterbox in a toilet because one of the students identifies as a cat.

That's veering into a psychological issue more than gender identity or sexuality.

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11

Imagine going to school and taking a shit in a litterbox. Presumably it’s private but what happens after that? Just cover it up a little and move on?

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0

If it was going to be true to form, they should be going outside in the garden beds. 

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10

What school was this exactly? Sounds like a social media story made up for a conservative message board to me.

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11

I'm not going to name it for fear of doxxing myself, as one of my kids goes there. 

They also spent a couple hundred grand building a gender neutral toilet. 

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0

So your child has confirmed to you that kitty litter boxes are in place?

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3

It's bollocks. 

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4

It's folklore that's been circulating for a few years now, particularly in America.  Recently Whangarei Girls High School featured on a Tik Tok video about this.  As far as we can all tell, it's completely false.

Pa1nter is probably a flat earther.  

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5

Weak excuse, your name's not Luxon is it?

https://www.stuff.co.nz/national/politics/301019597/luxon-admits-weve-got-it-wrong-on-number-of-cigarette-outlets-in-northland

Next we'll have Winston talking about kitty litter boxes.

 

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4

"A local school has had to install a litterbox in a toilet because one of the students identifies as a cat."

I call b.s. on that.

A more likely scenario, and one encountered frequently at all schools with new immigrants, is that new immigrant children have little understanding of the sit-down toilets we take for granted in NZ.

Many other countries use completely different types of toilets, e.g slit trenches where a users squats over the slit. Also, toilet paper. Seldom used in many countries, e.g. India, where hoses and cloths are common. Ignorant Kiwis think the signs, "please do not stand on the toilet seats" are funny. Well, Kiwis aren't that bright and need to see how the rest of the world functions quite happily, and hygienically, doing things differently.

Some posters here are full of sh.t.

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3

The student identifies as a cat and this isn't an area with a high volume of immigrants.

If we can accommodate people with a wide diversity of identities who are we to stop someone living out what they feel they are?

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0

Oh dear. Poor Pa1nter.

All credibility down the toilet. But he keeps digging his long-drop - deeper and deeper.

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7

A quick google student identifies as a cat litterbox - Google Search is just articles saying this is a myth. LOL, even Joe Rogan has admitted it is not true.`

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5

Come on man, "Cat Women" is a real thing saw it on a Batman movie. I would be thinking that the school uniform is more of a problem, I mean that black vinyl is quite something, Meow.

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2

It's Catwoman (there is only one), and to be clear you are a 50 something year old guy describing school age girls/young women dressed in black vinyl?

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2

Too many paint fumes? The other day it was a billion dollars changing names and now this. Seriously are you ok because this is a bizarre claim, but it can be cleared up here:

https://thespinoff.co.nz/society/08-06-2023/no-whangarei-girls-high-school-students-are-not-identifying-as-cats

 

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10

LOL - TikTok.

Seriously, we should ban TikTok and legalise cannabis in lollypop form - as it will be needed to wean off/calm down all these Winston-following TikTok addicts.

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Sorry Pa1nter, I too call bs on that one. It’s quite a common hoax with multiple articles from around the world debunking it. https://en.m.wikipedia.org/wiki/Litter_boxes_in_schools_hoax

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6

Got a link to this story?  Needs evidence as sounds like a fake news pick up.

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3

I'll give Painter the benefit of the doubt that he actually believes this to be true rather than intentionally spreading false information. Why are people so extremely gullible to this particular type of manipulation? I'm not saying people haven't always been open to being misinformed, of course that's as old as communication. But this recent appetite for just absurd pieces of information like this feels like it has incredible momentum. It boggles my mind. Could someone not use this skill to the betterment of our species rather than whatever end goal they're attempting to achieve with this nonsense. 

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2

Can you explain exactly how society has gone too far with 'sexuality'? And explain what the government has done to facilitate the problem.

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8

Well said. 🤙🏼

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0

Spot on.

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0

"their arrogant, virtue-signalling, woke, racist and divisive policies..."

Am i the only mid 50s Pakeha male who really felt unaffected and couldnt care less about the above ?

Im pretty sure the "largely harmonious" world we were bought up in is a look in the rearview mirror based on your race and socioeconomic status. The other fullas knew their place and were stood on if they looked outside of that. My wife is Samoan, they lived through the dawn raids, and had up to 3 families in a 3 bedroom house at times. Mum was working 2 jobs and the kids helped her clean till 3 in the morning.

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3

"Am i the only mid 50s Pakeha male who really felt unaffected and couldnt care less about the above ?"

No you're not. I remember the Springbok Tour protests and the Homosexuality Law Reform Act.

The same rhetoric was spewed about them, when the opposite was true.

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0

“The second and more important reason is that central banks lack the tools and direct influence needed to affect employment outcomes,” Graham said. 

Are you kidding me? RBNZ is currently increasing unemployment very effectively! That's their bloody theory of change! They think that if prices go up too quickly in a tight labour market, there is a risk that workers will secure higher wages, adding costs to businesses and setting off a wage / price spiral. So, their response is to:

Make workers and businesses poorer by increasing the cost of debt >>> investment and consumer spending fall >>> businesses lay people off >>> workers lose the power to secure those higher wages >>> prices stop going up.

The role of Govt in this model is to try and coerce people into depressingly crap, precarious work by keeping benefits low, running various employment and training schemes, and opening the borders to cheap labour at seasonal peaks. The more desperate people are for work, the looser the labour market, the lower the risk of inflation etc etc. Great work everyone.

Of course, this is all nonsense. Every significant episode of inflation in NZ has been caused by an imported price shock - typically involving oil and other key input goods (fertiliser, gas, processed food). It's very simple:

  • Consumers buy about $300bn of stuff per year
  • We import about $100bn of stuff
  • So, what happens if the average cost of imports goes up by 23% like it did in the year to June 2022? The maths is easy - you get $23bn of extra input costs (23% of $100bn).
  • Now, what happens if businesses simply pass those extra costs through to consumer prices?
  • Well, $23bn / $300bn = 7.6%
  • Voila, there's your expected CPI increase - pretty damn close isn't it?

Now, of course, the RBNZ and our reckonomist commentariat will argue that the correct response to this import price shock is to hike interest rates to make more people unemployed - "we must prevent workers getting higher wages or inflation will take hold and we'll be like Argentina by Christmas" blah blah.

What they miss is that hiking interest rates in a country where the private sector has debts of 145% of GDP (about $560bn), most of which is short-term fixed, just pushes up business costs - adding to the import price shock. So, when import prices stop going up (as they have) businesses do not drop their prices, because they are struggling with extra debt servicing costs. Consumer demand falls obviously because mortgagors are getting hammered, but businesses just hunker down, reduce their capacity, lay off a few staff - they don't start selling things for less than their costs! Definitely not in NZ where we have so many virtual monopolies.

What should we do differently? Have some honesty for heaven's sake. When we get an import price shock, don't roll out Adrian Orr to tell us to 'cool our jets'. Tell the public that we are experiencing an import price shock. Be clear that any companies found to be using this price shock to profiteer will face the full wrath of windfall taxes. Put some targeted temporary relief in place focusing on the systemically important goods that are triggering the import price shock (usually oil, which we need to get off quickly anyway).

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17

How come you added 23% to 300b to determine the 7.6% CPI increase, and not 100b which you stated as the import cost increase?

And why have you excluded increased costs to the 200b of domestically derived goods and services?

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Imagine we have only one massive business in NZ - let's call it 'ACME NZ'.

ACME NZ pays overseas companies $100bn for stuff they import into NZ. They pay their workers $150bn and their fat cat owners also get paid for being gracious.

ACME NZ sell $300bn of stuff to Govt and the public - that's all the stuff that consumers buy.

ACME NZ has lots of divisions, groups, and so on, but the payments and internal recharges between these groups all cancel out.

Now what happens when the price of imported stuff goes up 23%? Those $100bn of imports now cost $123bn. So, if ACME NZ pass that extra $23bn cost onto consumers, that $300bn becomes $323bn - a 7.6% increase.

Now what happens if the Aussie bankers that ACME NZ use double the cost of the the $200bn of debt that ACME NZ owes those banks? They start paying $8bn more in interest payments. What happens if that cost is simply passed through to consumers? What about if the workers gon on strike and demand a 5% pay rise? You get the picture.    

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6

Isn't some of the $200b derived from non imports though. 

I.e., domestic production is experiencing roughly the same supply side cost increases that are being felt by nations importing to us.

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You may well be right if it was all imported inflation, the RBNZ looked through that for a while assuming it was transitory. But then we had a shortage of labour / excessive demand, and people were demanding pay rises. Our local KFC was closed as they couldn’t find anyone to work! That could have spiralled, but hasn’t, most likely due to OCR increases. I expected 7% or so pay rise last year, but I don’t expect it this year. 

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re ... "Our local KFC was closed as they couldn’t find anyone to work!."

Lets examine that one for a bit as I believe you've drawn the wrong conclusions.

  • The KFC would have remained closed
  • The workers that wanted to work would have found new food related jobs
  • The businesses remaining providing food would have been largely smaller NZ owned businesses
  • NZ Inc benefits growing their small food businesses
  • NZ Inc benefits because profits aren't a) shipped overseas and b) into the hands of wealthy shareholders
  • KFC gets shamed because their wages are crap
  • NZ Inc. becomes healthier (maybe)
  • NZ Inc. becomes more food diverse (not being food diverse comes with huge costs) 

 

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There's a misunderstanding when we now talk about "inflation" whereas it's the cost of living. Inflation is in the rear vision mirror, the cost of living is 17% higher (or 19% if you use that measure) and is likely to stay there as there is no incentive to drop prices in an uncompetitive environment. Inflation should be measured as a forward extrapolation rather than looking at the quarterly prints from 12 months ago which are now completely irrelevant to any policy that the RBNZ think might help. The price shocks that started the inflation spike 2 years ago have completely reversed in almost every single case, some of these costs are even lower. So any inflation now is directly attributable to fiscal policy. Minimum wages are up about 40% over the last 3 - 4 years, how can a firm not pass this through to their customers? Cost of debt (monetary policy) is up an exponential amount, again, how can a firm not pass this through? 

If the government is serious about inflation there's 2 things they can do, stop spending and look at changing the measure of inflation to look forward rather than backward. Inflation is gone. Even the RBNZ forecasts of the next 4 quarterly inflation prints put them within their band.

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Is the real problem here that official CPI only measures the inflation that the RBNZ is interested in? 

I.e. it excludes specific items that the RBNZ doesn't want included as they would not measure what the RBNZ needs measured.

And yet we hear it quoted, and built into legislation, as the gospel on inflation. It never was, and never has been. Even the RBNZ acknowledges that.

The fault that it is used wrongly lies with our politician's ignorance (no surprises there) and with the fact lazy journalists continue to use, and promote, the CPI when other measures are more accurate and timely.

Have I mentioned that Kiwis aren't that financially savvy? (I'm sure I have. But best do it again as they're also slow learners.)

 

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3

The fault that it is used wrongly lies with our politician's ignorance (no surprises there) and with the fact lazy journalists continue to use, and promote, the CPI when other measures are more accurate and timely.

Bravo. 

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The fault that it is used wrongly lies with our politician's ignorance (no surprises there) and with the fact lazy journalists continue to use, and promote, the CPI when other measures are more accurate and timely.

And the education of the general public on these matters.

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Luxon has made inflation his main target not necessarily because that is what people want from him, but because it is the easiest to achieve.

He reads economic reports and projections like everyone else. Almost everyone now believes inflation battle is won, so by "going hard" on inflation Luxon can claim credit after a few months.

This also jives with his actual goal of cutting spending. Cutting spending becomes more palatable if you mask it as inflation fighting. 

This cunning is not always a bad thing, particularly if you are a politician. 

 

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Exactly. Does he actually have any policy that will reduce inflation other than culling public servants? 

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3

In what way does culling public services reduce inflation?

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What's your causal chain there between culling public servants and slower increases in prices (reduced inflation)?!?

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Well said. It is blindingly obvious.

But most Kiwis will completely miss it (... They're not that bright and easily fooled.)

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Well said, selecting and focusing on an ostensibly measureable and "objective" (in the loosest terms) measure is typical manageral thinking. To him inflation is just another KPI to 'fix' and use to justify his importance. 

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1

Just an excuse to get the razor blade out. Three years of a government that sits on it's hands as the country slides towards environmental collapse. 

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It's also someone else's (Orr's) job

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0

Agreed. Perhaps this is the start of the agenda to Orrexit for failure to do his job.

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So, house prices back into the CPI? With a more significant weighting than rent's paltry 9%?

Yes, it will suppress the CPI when house prices are falling (but house prices never fall?), but should help to stabilize our economy (ensuring productive businesses can still borrow if not backed by property). Bit perverse to do it now, but better late than never.

The whole justification for 'equivalent rent' was not to make the metric more meaningful, but to make the reported inflation look lower (RBNZ white paper, 1988).

At the same time, we could just replace the MPC with a simple equation: OCR = max(0, CPI) + 2, and we'd probably get a better outcome than the muppets we've had.

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See my comment above re how we're using the CPI. We're using it wrong.

It is the RBNZ's CPI. It is not, nor has ever been, a measure of the cost of living.

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If inflation is truly the no1 objective then good. It's decimating the retired. So what to do. Rates higher, unemployment higher, immigration lower, and Dti imemented.

Believe it when I see it.

All that's happened recently is protection for speculative leverage and bank profits. Has mattered not that this was against the interests of most kiwis. Makes you really wonder who the Govt actually serves.

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Depends how much you want to determine property investors and banks as the sole benefactors of everything.

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Luxon knows that the best way to address our "cost of living crisis" is to get the OCR back to sensible levels ASAP!

That's not rocket science. Raising interest rates is inflationary. And raising interest rates directly increases the cost of living. ... As Jfoe, Chris et al have been saying for months.

The RBNZ needs better tools. Does Luxon or Willis have a plan to give the RBNZ better tools? No. They don't. 

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What’s wrong with the tool that has controlled inflation very successfully for decades? Have a look at historic inflation charts, before interest rates were used inflation of 7% was common, these days it’s considered outrageous. 

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The RBNZ decides to print and spray billions everywhere. Tax free status of housing gains saw most of it end there. Shelter is a basic human need, so inflationary rocket fuel.

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re ... "What’s wrong with the tool that has controlled inflation very successfully for decades?"

“If the only tool you have is a hammer, you tend to see every problem as a nail.”

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Come on Jimbo, thats a little disingenuous. When Britain joined the EEC and the oil shocks hit, NZ was an almost failed state. 

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What is a sensible OCR level. Depends if you are borrowing or saving.

I see no point in having low interest rates as you will just borrow more and drive up the cost of housing. May as well pay people like me a decent interest rate and then the government gets 30% back in taxes.

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Well said. Simply bails out the risk taking speculators at the expense of savers.

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Another falling into the trap. Let me answer that ...

“If the only tool you have is a hammer, you tend to see every problem as a nail.”

Your correlation between interest rates and house prices is just that - a correlation. But correlation isn't causation.

It would be causation if the number of houses was fixed.

But the number of houses isn't fixed. Additional supply comes on stream every year.

The real problem is that the additional supply isn't meeting what the market needs ... and there isn't enough of it.

Case in point.

Some years ago supply was meeting the needs of the wealthy that could buy McMansions. But even then, the supply was constrained as McMansions needed large chunks of land and that land was scarce so prices went up. Thus, huge swathes of land were consumed building land-inefficient houses for wealthy people.

Meanwhile, what the market needed was land efficient dwellings in places that people wanted to live, typically close to work and amenities.

Alas, wealthy older people elected Councils who had no real interest actually solving the supply issue.

This went on for many years until 2016 when Auckland led the way (democratically) after government had forced change on Christchurch with the rebuild following the earthquakes. And then central government cried, "Enough", and forced more change through the NPS-UD, MDRS, etc.

Hope you note that I didn't mentioned interest rates or the OCR in the whole case analysis. Welcome to economics.

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"Correlation isn't [necessarily] causation"

Except that it can be. In the case of house prices and interest rates, they are highly correlated. And we have control over one of the variables - interest rates. Meaning we can control it, and for the last 40 years have done so - though not to the betterment of society, but for those who hold the assets they want to see increase in value.

While the number of houses isn't fixed, neither is the number of people using those houses. Again, related to a metrics we could control - immigration and birth rates - but intentionally or not, don't. Aside from birth rates being low due to the issue of increasing house prices due to intentionally lowered interest rates causing people to delay/reduce having children, an argument could also be made that one of the major reasons the west needs young immigrants is the rise in birth control/abortions - NZ alone has killed more than half a million future citizens in the name of convenience. (I realize it's a moral decision, but it has  economic implications).

With regard to McMansions - would these have eventuated if credit hadn't been so cheap that people could overbuild for their requirements? Is there a correlation between new build sizes per property and interest rates? I'm willing to bet there is.

There are other factors at play too, but these are the major ones, and both are controllable. By interest rates.

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I think Mcmansions were influenced by a few things, one being the 90's / 2000's culture of excess that we inherited from the USA, and another being bank lending favouring larger floor area properties. 

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re ... " In the case of house prices and interest rates, they are highly correlated. And we have control over one of the variables - interest rates." ... and ... "There are other factors at play too, but these are the major ones, and both are controllable. By interest rates."

I note that you gloss over the fact that recently (20-30 years?) house prices have been exceeding the rate of inflation by some margin - and even in periods where interest rates were higher than recent averages. You might want to rethink your assertion that interest rates have been "controlling' house prices because they really haven't.

I note too that your gloss over the damage done in other areas of the economy when interest rates are high. I.e. it is not just house prices that are affected (even if sometimes house prices not).

This is very real problem with using a blunt weapon like the OCR. Everything gets hit.

Or are you suggesting we should have a separate OCR just for house lending? If so, you've nailed it! And if you're also suggesting that we should have yet another OCR for house building, then take a gold star.

Both a specific house lending OCR and/or a house building OCR would be economically distortionary. But hey! Who cares. Both have been used before with only minor distortionary effects. And when those effects have become more than minor it is usually because politicians were protecting sacred cows.

 

 

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house prices have been exceeding the rate of inflation by some margin

And herein lies the problem - we've had massive inflation in house prices over the last 3 decades (~7% pa), and yet this has not been reflected in the reported rates. Deliberately, as I noted earlier. Hence my call earlier to add house prices back in.

It's no use calling the OCR a hammer looking at a nail, when the issue is not the tool, but the garbage input it's being fed.

I note too that your gloss over the damage done in other areas of the economy when interest rates are high

I like to leave space for others. But in this case - what areas of the economy - when not overladen with debt - suffer under high interest rates?

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 "efficient dwellings in places that people wanted to live, typically close to work and amenities" Want to live? In a high rise shoe box? That's what we are being socially engineered to want, although I doubt many NZers would choose to toss away the freedom of space we once had, unless by force of a thousand cuts from our clueless political/economic overlords.    

After the GFC, fear shook exponential growthism to its core and economic witch doctors were quitely panicking by flooding the media sphere with normalised ideas of negative interest rates and "helicopter money" to fight dreaded deflation. The response was to flood the zone with near free money and open immigration flood gates. We don't have a supply issue, we have a third world population growth rate issue and a truly reality blind band of door to door salespeople being recycled every three years. 

Still waiting for the social science of economics to factor realities like the words finite and paying 100% of the costs of externalities, into their ideological lexicon.

It's not rocket science!

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Palmtree08: It's not rocket science!

You're 100% right.

It's massively harder.

re ... "That's what we are being socially engineered to want, although I doubt many NZers would choose to toss away the freedom of space we once had, unless by force of a thousand cuts from our clueless political/economic overlords."

Can I paraphrase what you said? "I want to live like people did in the 1970s". 

You still can if you want too. Lots of small towns in NZ are still locked in the 70s.

But if you want the same in Auckland, you'll need 2-3 million. Times have changed. Some people haven't changed with them. And some people want to pretend we can go back to those day were it not for evil forces conspiring against them. 

There's no social engineering involved. It's just what change brings.

But you are right. We do need to change. We need to reflect the true cost of what we consume in the price.

  • But will people pay double for the prices of gas?
  • Or accept that achieving density through higher dwelling heights means our public transport systems will work far better?
  • Or that we need to eat less meat due to it's massively higher carbon footprint?
  • Or change our massively distortional tax system that funnels capital into relatively unproductive assets?
  • etc, etc.
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Obviously you haven't been taking notice, as anthropocentric economic ideologues engineer NZ and the world in the image of their fantasies? There's no going back. Too much destruction has taken place. Going forward, it's damage control.

"Evil forces conspiring against them." No conspiracy involved. It's just a species drunk on it's own mythology and self entitlement, strip mining the biosphere of the only planet in the known universe able to support complex life forms and calling this pathology "progress" instead of destruction. 

'Will people pay double for the prices of gas?"

Seeing as we have burned through the best half of our legacy geologically stored carbon as quickly as possible, the rest will be less available, less affordable, less EROEI and more environmentally damaging to extract and in waste. 

"Accept that achieving density through higher dwelling heights means our public transport systems will work far better?"

A problem created by growthists requiring dropping living standards to achieve. 

"That we need to eat less meat due to it's massively higher carbon footprint?" 

Again a drop in living standards engineered by growthists demanding more people, consuming more, requiring more industrial inputs,leading to the combined effect of water pollution, deforestation, species loss, collapse of climate stability, etc

"Change our massively distortional tax system that funnels capital into relatively unproductive assets?"

Productivity is the catchall cry for monetising the natural world as quickly and efficiently as possible for maximum shareholder benefit. 

The brave new world, being engineered by those ignorant of ecology, is not a pleasant place for anyone understanding the consequences of leaving the country/planet to be run by a sales team of one dimensional economic ideologues, without an original thought in their hive minds.

It's not rocket science, just the logical conclusion for a species behaving like yeast, in a finite space, with high tech.

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Raising interest rates is inflationary. And raising interest rates directly increases the cost of living. ... As Jfoe, Chris et al have been saying for months.

While there are good points  around this, I can't fully buy it as the be all end all. We have been through a period of decreasing interest rates for the better part of a decade until the overly-delayed hikes came hard and fast. Debt was cheap and businesses, households, local governments all jumped on the gravy train and borrowed and spent like drunken sailors. What we are seeing now is the large-scale behavioural shift needed in ours and the world economy for those countries that all bought the QE sales pitch and doled out money to the masses in droves. The country got far too comfortable with debt, and now that things are coming back to an equilibrium (OCR has historically averaged around ~5%). The issue is debt, period. There is too much of it, and the banking sector puts too much stock in the housing market which makes it harder for businesses to get loans. When businesses adjust to an expectation of a OCR around 5-6% longer term then they will make appropriate financial decisions to continue operating, or go bust. 

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"Luxon wants inflation put at the top of the agenda"

Bollocks. Look at the first things that are getting pushed through. Repeal tobacco legislation, reverse EV subsidy, reversal of tax deductions and brightline test for landlords.  None of these things are about addressing inflation, they are about paying back their donors. 

Chris Bishop former tobacco lobbyist in the media today questioning the harm of tobacco, absolute disgrace of a human being. 

https://i.stuff.co.nz/national/politics/301019486/live-national-casts-d…

And a bare faced liar barely a week into power.

"Actually, the changes are highly speculative and were opposed by some people in the anti-smoking/smokefree movement."

Who within the anti-smoking/Smokefree movement" is asking for these laws to be repealed. No-one. 

Led by Luxon, worse National leader in living memory. 

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When that crowd talks about the honour and privilege of service and responsibility…you get a little taste of 🤮in the mouth.

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“This is an unlikely scenario, as employment levels and inflation are closely correlated, but one can always dream up a hypothetical economic shock that would cause it to happen.” 

Wasn’t this the case at the start of our inflation cycle? RBNZ didn’t want to raise rates in fear of harming their employment mandate?

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It depends on which type of inflation! The imported inflation is almost dead! Even OPEC is not able to reanimate it. Domestic inflation however is alive and kicking! Driven by market in-efficiencies like Duopoly's, closing of strategic assets (the refinery), a significant portion of old fashioned AngloAmerican greed and not enough exports to pay for the imports leading to extra funding costs. (We have to borrow for our imports!)

Domestic inflation is where all his sponsors and donors are operating and will be a much harder nut to crack.

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Imported inflation is rapidly coming down,  and will  be soon be at zero. Even if domestic inflation remains high (eg 5%) the CPI will be tumbling down and getting close to 3%. If that happens,  what will Mr Orr do after his tough-man statement of last week? I dont think he will want to lower the OCR because he will want to save face, and will continue to hark on about sticky domestic inflation.

If you look at historic charts, going back 10 years,  you will see that domestic inflation was mostly in the 2-4% range, and imported inflation sometimes as low as -2%, which kept the overall CPI in the magical 1-3% range.

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"I dont think he will want to lower the OCR because he will want to save face."

I don't think saving face will be a consideration for him. Diesn'strike me as someone who cars what the interest.co.nz commentariat thinks. He'll be led by the data. 

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https://www.nzherald.co.nz/nz/politics/smokefree-laws-pm-admits-he-got-…

I mean this is just embarassing and reaching Trump levels of lying. It's been like one week and they are live tv just plain straight up lying. 

Chris Bishop should resign. 

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Nobody cares mate, if you are a smoker you are an idiot, stop trying to blame others. The best thing that happened years ago is that smokers got kicked out of clubs and restaurants so they can now go somewhere else to slowly kill themselves without trying to take me with them.

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I care.

I don't want my kids, or anybody's kids, "just trying it" only to find out that's it's as addictive as heroin.

I also care about governments getting their facts right. I also care that dorks will let government get away with anything because its "their" team being totally friggin' useless (and destructive).

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Tbh I really did like Chris Bishop's face..........

When he realized how badly he'd been caught out.

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Yeah, I care too - and we had an opportunity for a virtually smokefree generation - only one of my grandkids would ever have been able to buy smokes legally.

What a wasted opportunity - up in smoke, literally.

I'm almost as annoyed about this as JK's betrayal in lifting GST.

 

 

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Nobody cares that the new government stands on live tv and lies on demonstrable fact? The lie is pointed out to Chris Bishop and then he just ploughs on with the lie? Not even an acknowledgement that he will go and check the report he hasn't even read.

In their first week in?  

It's not about the tobacco per se (which is a hideous policy position) it is more about the bare faced lie and willingness to continue with the lie in the face of evidence to the contrary. 

"I haven't read that report" 

"I'm by no means an expert"

But hey .. I'll just keep lying because my tobacco mates fund our party and the deal is I'll do everything I can when I get in power to help them even if that means it's terrible for the country. This is the current UK Tories writ large. 

I f****ng care. This is not acceptable for our politicians. We are not the US/UK and I don't want to become them. 

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I f****ng care.

Me too. 

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He was just parroting Luxon.  They should both go down.

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Anyone who expects the new government to lower housing prices is dreaming.

Once the mortgage rates drop, prices will continue to rise

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Not if supply keeps up.

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