David Farrar: Monetary policy needs mates

The NZ Initiative has a research note out on how fiscal policy needs to work with monetary policy. They comment:

This analysis does not dispute that the RBNZ’s high interest rates were the proximate cause of the downturn. However, it argues the Bank had little choice. It was confronted with the insidious threat of inflation expectations breaking free from their anchor, a development that would risk a return to the deficit-spending stagflation of the 1970s and early 1980s. After all, following December 2023 changes, the Monetary Policy Committee’s single operational objective is price stability – 1-3 percent, with a focus on the 2 percent midpoint.

Dr Oliver Hartwich: When central banks get the blame for doing their job

Australians watching the economic drama unfold across the Tasman might find the plot familiar: An economy shrinks far faster than anyone forecast. Manufacturing slumps. As the gloom deepens, the blame game begins.

Yet what is happening in New Zealand is more than the usual grumbling. It is an extraordinary pile-on. A powerful and highly unusual coalition has formed with a single, unified demand for the Reserve Bank: deep cuts, now.

Claire Matthews: Will the next Reserve Bank governor relax capital requirements for banks?....

Calculated risk: will the next Reserve Bank governor relax capital requirements for banks?

Adrian Orr has so far not spoken about the reasons for his recent and unexpected resignation as Reserve Bank governor, but the sudden departure caused understandable speculation.

One suggestion has been that Orr was at odds with the government over his requirement that the Australian-owned New Zealand banks hold high levels of capital compared to other countries.

Professor Robert MacCulloch: Setting the OCR

Should a Key Member of the RBNZ's Monetary Policy Committee (MPC) not Turn Up to Set the OCR (During School Holidays)?

Yes, its school holidays at present. The Reserve Bank's MPC meets only several times a year to do the hugely important task of setting interest rates. We're presently in the middle of a recession that, in the words of the RBNZ Governor, was "engineered" by the Bank, costing the livelihoods of millions of Kiwis. The high inflation we're experiencing was largely caused by the RBNZ as it unnecessarily printed $50 billion, flooding NZ with liquidity during 2020-22.

Ele Ludemann: Rural banking inquiry

The government has asked the Primary Production Select Committee to launch an inquiry in to rural banking:

Michael Reddell: Comparing Treasury and Reserve Bank forecasts

I put a range of charts on Twitter late last week illustrating why, from a macroeconomic perspective, I found the government’s Budget deeply underwhelming. I won’t repeat them but will just show two here.

The first is the Treasury’s estimate of how the bit of the operating deficit not explained just by swings in the economic cycle change from 2023/24 (which was largely determined by last year’s Labour Budget) to 2024/25 (influenced by this year’s Budget choices)

Michael Reddell: Excess demand and the Reserve Bank

After my post yesterday I had a few people get in touch, spanning the positions from what one might call extremely dovish to extremely hawkish. My key chart in that post was this one.

Point of Order: Have the new leaders forgotten the parlous state of the country’s finances?

While National, ACT and NZ First are scrambling over the formation of a new government, their leaders appear to have forgotten the parlous state of the country’s finances and the urgent need to get them back into shape.

Heather du Plessis-Allan: Grant has opened the money hose

Lock it in; it looks like a very good chance that your mortgage rate is going up, because Grant opened the money hose too much yesterday.

The economists at almost every one of our big retail banks have come out in the last 24 hours now predicting a bigger hike in the OCR either next week when Adrian Orr resets it, or in July when he comes back for round two.

BNZ says the Budget is the straw that broke the camel’s back re the official cash rate.

Point of Order: Inflation is not slowing down yet....

......so can Hipkins take a tip from Prebble and risk a snap election?

Inflation is showing little sign of slowing down, posing a problem for freshly minted PM Chris Hipkins.

According to that old campaigner Richard Prebble, Hipkins should call a snap election. If he waits till October, he risks being swept away.

The dilemma for the new leader is that fighting an election while inflation is raging is no fun at all. It underlines the extent of Labour’s failure to implement successful economic policies.

Don Brash: Inflation: Are we out of the woods yet?

The last time inflation was over 7% was more than 30 years ago, and I was responsible for doing what Adrian Orr, the current Governor of the Reserve Bank, is trying to do now: get inflation back to the target mandated by the Minister of Finance, in my case within a 0 to 2% range, and Mr Orr’s case within a range of 1 to 3%.

A few weeks ago, there was at least some cheering when the inflation figure for the year to September was announced: it showed that the Consumer Price Index – which is how most people think of inflation – had risen by just 7.2% in the 12 months to that month, down fractionally from an increase of 7.3% for the 12 months to the end of June. Perhaps at last inflation was slowing and we could look forward to the Reserve Bank easing off the brake of steadily rising interest rates.

Mike Hosking: Adrian Orr's next move is the crucial one

Another episode Wednesday from the Reserve Bank. It's worth paying attention to, given it affects every single one of us.

And survey after survey indicates large numbers of us are suffering because of it.

Inflation, currently at 7.3 percent, has it peaked or not?

Frank Newman: Changes to development contributions

Last year parliament made an amendment to the Local Government Act that has forced local councils to make changes to the way they charge development contributions. This is good news for commercial developers, but the benefits are less clear for those developing residential property.

Development contributions are a charge imposed by a council to recover some of the capital costs incurred by the council when providing infrastructure services for the development.

Frank Newman: Low interest rate era to end

Yesterday the Governor of the Reserve Bank sent the strongest signal yet that the era of low interest rates is about to come to an end.

Graeme Wheeler said, “New Zealand’s economic expansion has considerable momentum. Prices for New Zealand’s export commodities remain very high, especially for dairy products. Consumer and business confidence are strong and the rapid rise in net inward migration over the past year has added to consumption and housing demand. Construction activity is being lifted by the Canterbury rebuild and by work in Auckland to address the housing shortage. Continued fiscal consolidation will partly offset the strength in demand. GDP grew by 3.5 percent in the year to September, and growth is expected to continue around this rate over the coming year.”

Frank Newman: Interest rates to hit homeowners and businesses

2014 is likely to be a tough year for debt burdened home owners and businesses. As expected, last week the Governor of the Reserve Bank left the Official Cash Rate (OCR) unchanged at 2.5%. Of greater interest was his commentary.

The Governor has for some time warned borrowers that interest rates will rise. Last week he was more specific. The first of the interest rate increases is likely to be announced on 13 March 2014, and rise 1% (100 points) in 2014 and by 2.25% over the next two and a quarter years (through to mid-2016).

That means a family with a $200,000 mortgage is likely to be paying about $40 a week more in interest this time next year, and $85 a week by June 2016. 

Frank Newman: Interest rate rises and Meridian

It should come as no surprise that interest rates are likely to start rising from about April next year. Last week the Governor of the Reserve Bank, Graeme Wheeler, reaffirmed that outlook but was more specific about the size and speed of interest rate rises.

Radio New Zealand reported, “The Reserve Bank says the official cash rate could increase by 2% from 2014 to the beginning of 2016, which could mean interest rates on first mortgages of 7 - 8%. The central bank says if the Loan Value Ratio restrictions do not slow house price inflation, larger increases in the benchmark interest rate would be required.” In other words, expect interest rates to rise by 2% over the next two years, and more and faster if the property market (in Auckland) continues to charge ahead at 10% a year.