Frank Newman: Interest rates and changes to local councils

As expected, last week the Reserve Bank cut the official cash rate (OCR) a quarter of a percent to 3%. This follows a reduction of the same amount six weeks ago.

Floating mortgage rates adjusted immediately. Kiwibank and the ANZ reduced their floating rates by 0.25% to 6.15% and 6.24% respectively. The other major banks are expected to follow suit shortly.

The key points in the Bank's announcement are, "Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility... The growth outlook is now softer...Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply...House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected."

The weaker economy means it is likely that at least two further 25 point cuts will follow at each of the next two six-weekly interest rate reviews. The message for borrowers is to keep fixed rate terms short. The best rates appear to be in the one to two year range at between 4.89% and 4.99%. At some point the long-rate (3 and 5 year terms) will become attractive (probably when those rates fall to the 5% to 5.25% range).

The week has been significant for the future of local government. Now that the amalgamation agenda has failed, central government is pursuing reform from another angle. In a speech to the Local Government NZ conference, Local Government Minister Paula Bennett made it clear that changes are on the way. Here are some extracts from that speech.

"I will not legislate for large amalgamation. I am as tired as our communities are of having an argument over how many mayors there should be and over whom is bigger than whom and which area will dominate... They (the Local Government Commission) are going to work alongside you and your communities to ensure that we have the right structure, legally, financially, and with the right accountabilities to ensure sustainable growth in our towns and cities. This might mean a CCO on water or transport across a region. It could mean a different business structure or increased responsibilities and accountabilities for Regional Councils. It could even mean in areas that might put a number of CCOs in place for key growth and infrastructure that there is no longer a need for a Regional Council... the Local Government Commission will be working up various structure options for each region to look at and decide what works best for them, and then where necessary I will legislate to either set a new CCO up across a region – or even to take something away... So I implore you to do something about it. Be brave – own the change and both the Commission and I will do everything we can to assist and support you. But let me be clear – there will be change."

The Minister was also critical of local council performance generally. "...first and foremost local government needs to demonstrate that it can live within its means. Ratepayers are not willing to pay more for services while they see waste. Year ending March 2015, local government wages and salaries increased 2.3 per cent, the highest since 2012, and significantly above CPI, the central government, and private sectors. And the recently released LGNZ Survey identified that local government was rated poorly on trust to make good spending decisions, value for rate dollars spent, and managing finances."

Minister Bennett has started the reform process by changing the membership of the three person Local Government Commission (LGC). Sir Wira Gardner has replaced Basil Morrison as chairman and Mr Leigh Auton replaces Anne Carter.  (No doubt Basil Morrison will be rewarded with a knighthood in the New Year's honours list!)

It is clear the Minister wants amalgamation but wants to sidestep the opposition that came from mayors who would be out of a job. Ensuring their job security and status means they are less likely to oppose proposals to pass management of essential infrastructure onto regional organisations.

Northland will be one of the first regions to see this new strategy put into effect.  I would not be surprised if the new look LGC has already been in touch with local councils to say it would like to have a chat.