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Sludge Report #176: A Blunt & Heavy Instrument
Sludge Report #176: A Blunt & Heavy Instrument
Includes full audio of today's RBNZ Governor's press conference (16 mins)
Official Cash Rate Hiked by (another) 25 Basis Points
By C.D. Sludge
Also posted to Scoop's Eco-Economy email list
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New Zealanders be warned. Interest rates are going up and there are no signposts indicating any relief in the medium or near term.
In December Dr Bollard warned Kiwi battlers not to keep ramping up their housing prices. They paid no apparent heed.
In March Dr Bollard put his boot into the banks telling them that unless they played ball and hiked up interest rates as he wanted for housing borrowers he might be forced to take other measures.
This time the Australian banks appeared to be listening considerably better than the Kiwi battlers did in December. The banks responded swiftly - fixed rate mortgage rates are now roughly 1% higher than they were in March.
In its latest statement the bank expects 25% of all fixed rate mortgages to be re-priced in the next 12 months increasing the cost to borrowers by between 70 and 100 basis points (0.7% to 1%).
A further 15% of mortgage borrowers will face instantaneous increases in the cost of their borrowing by 0.25% following this morning's announcement.
Practically speaking this means a 10% to 12.5% increase in the cost of borrowing on fixed rate mortgages (or an extra $20 a week in debt servicing per $100,000 in mortgage debt).
Meanwhile floating rate borrowers - who are already typically the most indebted and paying the highest rates - will meanwhile experience the pain of seeing their interest rates close in on 10%.
It does not take rocket science to figure out that this is going to hurt.
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And so Dr Bollard will make no friends today.
Householders will be angry that their latest pay rise has just magically vanished into the morning breeze.
Exporters will be angry that this decision will put even more pressure on the high exchange rate.
And politicians will be angry that everybody else is angry.
So why then - given that interest rates have only started responding to his signals in the last 2-3 months - is Dr Bollard being quite so hard on his fellow Kiwis today.
The answer to that question lies in the fact that the New Zealand economy is showing no evidence at all of slowing down in the manner that the Reserve Bank would like it to.
Consumer confidence remains high, the housing market buoyant, wage inflation remains at 3%+, Dairy products have gone stratospheric and paradoxically (though the bank is worried about inflation in the medium term) current inflation is presently nice and comfortably below 2% and well inside the 1-3% band that the bank targets.
All of which points towards just how blunt an instrument monetary policy is becoming.
On the face of things the Reserve Bank is losing confidence in its own ability to slow down Kiwi battler spending habits.
Why hit the hike button yet again after the retail banks have finally removed the previous inhibitor to effective monetary policy? Namely the insulation from the OCR which has been present in fixed term interest rates since 2004.
While the bank economists expected this move – as they almost always do – this does not make it rational.
In the circumstances it might have been nice to have seen a little more patience exercised by the Governor and his boffins. Patience is a virtue of the lucky.
We already knew that Monetary Policy was a blunt instrument, today Dr Bollard has illustrated just how heavy that blunt instrument can be.
READ THE
FULL MPS PDF FORMAT:
http://img.scoop.co.nz/media/pdfs/0706/jun07.pdf
Some Questions and Answers
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Alastair Thompson
Scoop Publisher
Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.
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