By Bernard Hickey
Higher house building and electricity costs helped drive annual inflation to its highest level in almost two years in the December quarter, sparking a call from ANZ's economists for the Reserve Bank to hike the Official Cash Rate (OCR) as early as next Thursday.
Statistics NZ reported the Consumer Price Index (CPI) rose 0.1% in the December quarter and was up 1.6% in the year to the December quarter. Nearly half of the annual increase was driven by higher housing construction costs, rents and electricity prices.
The 0.1% inflation figure for the quarter was stronger than the consensus economist forecast and the Reserve Bank forecast for deflation of 0.2% in the December quarter and inflation for the year of 1.4%.
ANZ Chief Economist Cameron Bagrie said the OCR had a limited shelf life at 2.5%.
"While the January OCR decision is finely balanced, we expect the RBNZ to raise the OCR at next week’s OCR Review and follow up with two additional hikes in subsequent meetings," Bagrie said.
Statistics NZ said a 12% rise in international air fares, higher dairy prices and a 0.5% rise in housing costs more than offset lower vegetable and petrol prices.
The result may increase expectations the Reserve Bank will have to start raising the Official Cash Rate earlier than the current expectation for a March 13 start. Most economists are still grouped around a March start to the rate hike cycle, which the Reserve Bank has forecast could see the OCR rise as much as 2.25% by early 2016.
Statistics NZ said the rise in prices for housing and household utilities reflected higher costs for maintenance, higher costs for new houses and higher rents.
Prices for milk, cheese, and eggs rose 4.2%, the highest quarterly rise since the September 2010 quarter. Vegetable prices fell 20% in the quarter for seasonal reasons.
The annual increase in the CPI was the highest since the March 2012 quarter and almost half of the increase came from housing and household utility prices, which rose 3.2% over the year.
"There were increases across the board: purchase of newly built houses (up 4.7%), housing rentals (up 2.1%), property maintenance (up 4.3%), household energy (up 2.4%), and property rates and related services (up 4.1 percent).
Cigarette and tobacco prices rose 12% after excise duties rose in January 2013.
Electronics costs fell 10% while telommunication and car prices also fell.
Construction inflation spreading
Statistics NZ said new house building costs rose 1.5% in Auckland during the quarter, faster than the 1.3% seen in Canterbury.
"This is the first quarter since the December 2011 quarter that the price rise for newly built houses was stronger in Auckland than in Canterbury," Statistics NZ said.
53% of respondents reported the cost of newly built houses had risen in the December quarter, with 76% seeing increases in Canterbury and 64% in Auckland. The national figure was the highest since the September 2007 quarter, excluding the December 2010 quarter when the GST rate was increased fro 12.5% to 15%.
House construction costs rose 4.7% nationally in 2013, with Canterbury rising 9.5% and Auckland 2.4%. Rents rose 2.1% for the year, with Canterbury rents rising 5.1% and Auckland rising 2.4%. Local Authority rates rose 4.1% for the year.
Excluding Canterbury, newly built house prices rose 3.9 percent.
Economist reaction
Westpac economist Dominick Stephens said the data was a big surprise, which was reflected in a sharp rise in the New Zealand dollar and a 5 basis point rise in two and 10 year swap rates.
"This stronger than expected data does raise the legitimate question of whether a January OCR hike could be on the cards," Stephens said, adding he would release a fuller view later in the day.
ASB's economists however pointed to higher than expected tradeable prices for the overall result being higher than expected. ASB stuck with its call for March hike for now, although noted inflation pressures were building, particularly among retailers not passing on the benefits of a high New Zealand dollar.
"With household demand improving over the past year there are signs retailers are looking to recoup some of that lost operating margin," ASB's Christina Leung said.
"We continue to expect the RBNZ will wait until March to raise the OCR, although we now see the probability of a January OCR increase as slightly higher now (25%, up from our pre-CPI view of 20% probability)," Leung said.
"Although NZ inflation is contained for now, the OCR will need to be increased before long as demand improves and brings a lift in underlying inflation pressures over the coming year. Perhaps the biggest risk now is the tail wagging the dog i.e. market pricing building in a significant enough chance that the RBNZ sees the path of least resistance as delivering an OCR increase in January," she said.
"However, the RBNZ will be mindful that a change in tack since the December MPS from its March/April indication risks giving an already-high NZ dollar a further jolt higher."
(Updated with details, market reaction, economist reaction)
64 Comments
Rising power is stretching household budgets further, yet the bank twits want to make the household budgets even worse by raising interest rates.
"dwelling insurance" rises driven by increases in EQ and re-insurance costs? so one offs?
This is going to be interesting, I wonder how long before something gives...
regards
Hmm, well maybe....the Q is will they? and whats that effect?
So if ppl such as myself have little or not wage increases then simply we spend less elsewhere, which deflates those parts of the economy relying on that spending.
Do we treat these as inflation? or do we say like GST its a one off adjustment and ignore it?
The problem that worries me is while we are forced to live with increased costs in some areas we have to consider that others then shrink, so job losses, closures...that is deflationary and can pull the entire economy down.
The best way I can describe my worry is we have an expectation a man can run while one leg takes more and the other withers as its left with less...at best he'll run in circles, or more like he'll keel over.
regards
Steven, in the economy of la la land he will just print himself up another leg of course.
Let someone else worry about having 3 legs and the effect that might have on other runners in the race. We will 'sell' it to the other runners on the basis it is in their interests that we print up a 3rd leg as then we will consume more of what they are selling.
I don't think a little deflation will pull the entire economy down. Spending less in one area because you have to spend more in another isnt deflation - you are still spending the same (or a little more with a 'little increase' as you put it. As to wage inflation - what's the bet that the minimum wage will go up again this year - given the economy is doing so well AND ITS ELECTION YEAR and all? After all - National put it up last year when the economy wasn't doing so well and it wasnt election year... Most people will get a wage increase this year is my bet.
Gordon I'm suprised you haven't learnt by now that EVERYTHING is good for property. Higher interest rates? More renters, higher rents, higher house prices. Lower interest rates? More buyers, higher house prices. Inflation? Higher house prices. Deflation? More people renting, higher house prices. I think you get my drift.
gordon, Big Daddy is Olly Newland. Olly always was a property trader and speculator. Perhaps he has changed in recent years?
Certainly though, no long-term property investor with minimal debt (eg: 20 or 30% loans to valuation ratio) will be nervous at the moment.
Property is profitable two ways. There is capital gains. There has been a heap of that in the last decade and more.
And there is rental income. There hasn't been as much in the way of rental increases in the last decade or so, due I think to declining interest rates.
But whatever happens in the future, profit will be made in one or the other segment of the market. The long-term investor will benefit from both.
Such an investor need only wait. That is why there is always a smile on their dial.
I disagree that it will force people to sell in the near future. That is a last ditch, extreme move. More likely that households feeling the pinch will cut back on the coffee, eating out, new clothes, cars, holiday etc. All it will do is shift money from households throughout the economy to the banks. Which is obviously why all the banks are keen to see a raise in rates.
Gordon - so what is the percentage of people who you believe to be over-committed? You woul d need to know this before you can state prices would move lower.
You would also have to think about NZ having interest rates which would attract foreign money.
There is also the BIG question on Government debt and how they will reduce this debt. It is usual practice for Governments to inflate their way out of trouble. If they can increase any price of any goods or service they will. This is why NZ has many areas of over-regulation. The regulations are there to increase prices but sold as making things safe or some other plausible excuse.
The only reason house prices are high is because Councils have constrained land supply. The RMA has also played a significant role. There are a few other things which have been identified on interest which are known contributors.
Actually not correct. Prices can move lower, we dont know what % that is, yes, sure.
NZ govn debt isnt that high and we will be paying it back, I see no sign we'll inflate it away.
Regulation, well taht and teh RMA are what ppl want.
Houses prices, no lots of mad speculation....
regards
These banks are so self serving ANZ you should be ashamed.
Should the OCR rise NZ will be able to provide a higher (by currency comparrison), return on investment. Aditional funds will come into the country which always seems to be 'invested' in unproductive but secure assets such as property - so the housing bubble will grow and property prices will rise.
Oversea's 'investors', don't have to worry about the OCR at all, they can probably borrow privately from familly in their home country at what ever the countries lending rate is + a small family margin.
So once again that leaves people born in NZ carrying the mortgage rate increase from their staginant pay hoping they will magically cash out of their property with somesort of capital gain.
The gravey train for the banks is that when house prices rise they can legitimately lend more money to shackled NZ passport holders, nice one.
Grant, the banks ability to lend @5% deposite has dried up, which is why we are seeing a lower number of home sales (volume), by not moving the OCR and with less entry's into the market at the budget end (first home buyers), the average price will increase but only because the entry level market is wiped out.
The problem for all of us is that we don't have the RBNZ models for forecasting inflation. They aren't perfect but neither are our back of the envelope, finger in the air personal ones either..I'd back the RBNZ's anytime over those. And the RBNZ isn' so concerned about what inflation is today (only in what the starting point is) as much as what their models say will happen without a hike or cut etc. Unfortunately far too many here focus on what it is now ratehr than where its going, mostly because they have no idea, or want to talk their book instead.
What you say about the move increasing capital flows into NZ may have some truth in the immediate aftermath of a hike, especially if it was JAn which I doubt, but remember that investors and the market have been working on a March/Apr rate hike anyway so this is only a very moderate upside surprise i.e. its already priced into the current level of interest rates and currency that these people are operating with. And so far as history in concerned, although there's a lag, higher interest rates inevitably top out a house price surge, so unless that breaks down this cycle you can be sure that the banks would much prefer no OCR hikes and lower interest rates so that housing affordability can stay as low as possible to assist thm in their lending, not the other way around.
Not so sure, I think for the banks its a bit too low, they want to raise rates I think. I mean what are they borrowing at? Higher than the OCR? if the OCR goes lower would their wholesale rates? suspect not.
I think we'll see a 25~50 point rise pre-June myself....rock and a hard place. Wheeler has to be concerned about this madness continuing and unless the LVR really bites....
regards
Grant A: People soon forget don't they? In the immediate aftermath of the ChCh earthquakes, Alan Bollard cut the OCR by 50 basis points. That interest rate cut was characterised at the time as an "emergency" cut in rates, to bolster the confidence of the "nation". Time has passed, the dust has settled, the extent of the damage, while expensive, was not quite as widesperead as first thought, the Christchurch rebuild is going gang-busters, the rest of the country has forgotten about it, do you not think there is a case for reversing that emergency adjustment
iconcast - I wouldn't want to say it too loudly on this site which seems full full of property investors/speculators, but yes of course its definitely my view. Rates have to go somewhat higher because of all of those positive factors impacting the economy right now, and although I think March/Apr is about right, if it proves to be wrong I suspect it will be because its late, not early. People claiming that no hikes should be made ever can only be basing that upon some impending disaster striking in the near future, and whilst we can all see areas where that could come from, if we knew that was going to be the case i.e. soon, then I'd agree with them. But we don't, and if it doesnt happen early, and the RBNZ has unduly delayed, both them and many borrowers would be cruxified because history shows that when theyre late, late always means much higher rates than otherwise prove necessary further out - i.e. something that may be terminal for a few highly leveraged borrowers rather than something more modest that can be worked around. I wished more people understood that.
Steven - by "bank twits" I take it your talking about the central bankers, the ones who actually do raise rates or not ? Bank economists merely speculate as to what the RBNZ is going to do, they don't do it themselves. Such economists have no more power in that regard than anyone else including those of us one here who likewise share opinions on what the RBNZ should do, or opinions on what it will do, two different subjects. Personally I'm only focused in the latter
No, not RBNZ, but our local bank economists.
Just how long have they been talking up rates? 4? 5 years? guess like a stuck clock they'll be right eventually.
What the RB will do is a hard Q, I wouldnt raise myself, not til I see unemployment dropping....what I think they will do is different.
regards
Fair enough Steve, but my response to you was in repsonse to your " yet the bank twits want to make the household budgets even worse by raising interest rates" comment which I probably mistook as being similar to that utterred repeatedly on here by one misguided soul that thinks that the banks themselves are the ones that determine where rates go. If you were just suggesting that the economists have got their views/calls wrong in the past, then I have to agree. That said, I think they will finally be right this time, and its been pretty obvious throughout most of 2013 that it would be the case and why fixed rate options in the last 6 months at least have been a no-brainer listened to by few..
One has to look at the items that have inflation and understand what legislative and policies are interferrring in the price rises.
Do increases in the M3 Money supply show any correlation to the CPI increases? It is all in appropriate questions.
Bernard you need to question the information you receive from your sources more. Question how the Government and its cronies can manipulate prices upwards and downwards.
A little bit of Poetry:
Business and State
Business knows another side - it’s a different type of State
Informing all the people - Business needs regulated is ambiguous and fake
Why shouldn’t they believe – is so gentle and so kind?
But the people they do not know - what really goes on in the States mind.
If Business told them - that there is a different State you
A State they would loath – if they really knew
They’d probably think that business was to blame
And Business would only be subjecting itself to ridicule and shame
Emotional abuse leaves no visible scars - for all the populace to see
The States not breaking bones you know– they’re breaking the life-blood of the economy
You trample through the core of every Business hide
Covering up our errant ways whilst stealing Business dignity, respect and its pride.
Business has become completely unappealing
As it constantly dreads legislative compliance and spieling
Being around State makes Business feel very edgy
Waiting around for State – to implement its next feeding frenzy.
What will business be – when fully controlled by State?
Useless and ugly with an evil and corrupt trait
Or will it be that Business - is just like some cheap whore?
Something which State can rape for glory and a whole lot more.
Will State ask Business - how they achieve from day to day?
And then not listen to a word that Business has to say
Waiting to accuse it of lies and deceit
Saying Business screws State and the people who are vulnerable and weak.
Will the State throw out the Small and Middle Business-man?
Finding fault with every single thing that they can
Will State punch Business - with words so hard they consume and devour?
All in an effort to gain control and fulfil ever-lasting, lusting power.
Or will they resort to unhelpful threats using narcissism and spying to cause death?
Wish I could tell them to fuck-off, we were all born equal on this home-planet earth
But you cannot kill something which no longer exists
As it died a slow death from legislative and policy administrative misfits.
It’s always the same ending – when you portray you won a fight
You expect to be voted back in - as you bullshit up every plight
When all business wanted was to be left alone and in peace
In a happy place – where the State bullying and hurting has all ceased
In this dysfunctional relationship between Business and that of State
You torture Business daily with enslavement by compliance – a system replicate
The hurt always cuts deeper - as you indoctrinate servitude
And the business heart bleeds from all this State run ineptitude
Time will never heal the scars that Business bears
As the State manic Bureaucracy - buries itself deeper throughout many years
And all of business changes - to who you want it to be
It makes it so much easier – than a business being me.
Copyright 2014
and the resultant panic? All that cheap money abroad getting pulled back to the USA as the Fed tapers. So the commercial/retail banks wholesale rates will do what when this happens?
NZ commenators for years actually I think, but I think a rise is coming....maybe 50basis at one go for a shock and awe event.
regards
Its too soon for a rate hike
My View :- I doubt there will be rate hike next week , its still too soon .We are being softened up for one in March however .
My Reasoning : - Much of the inflation is in administered prices such as municipal rates and taxes , electricity and water , and the weighting of the rest is relatively small .
and
The administered cost increases tend to be opportunistic rather than signs of an underlying inflationary trend.
and
The underlying PPI is benign , other than labour costs for those in construction , and that is localised and due to demand for those skills .
and
A prudent Central Bank will always send strong signals to make sure no-one is caught off guard . they dont want to be seen as reactionary or rash
So expect the RBNZ to send strong signals of its intentions for months beforehand , because like dope addicts we have been on a cheap money high , and we need to settle debts and do some budgeting in preparation for a new set of spending rules .
and
We still have a currency that is way too strong for our own good .The strong Kiwi $ is masking all the other bad news , and a rate hike will only exacerbate this .
I agree with you Boatman, but unless something adverse happens in the next 19 days, I think that the strong signal will come 6 weeks early on 30 Jan for a 13 March hike, but maybe a 24 April hike. To be frank, if you are used to analysing every word uttered by the RBNZ as markets and economist do (and who then inform their customers), the RBNZ effectively made that signal back on the 12-Dec, but they will make it even plainer to the economist non-believing public on the 30-Jan.....my pick anyway.
The strong Kwi $ has been the reason that they haven't gone earlier i.e. its kept tradeables inflation negative which has balanced out the elevated non-tradables inflation until now, but the latter is now showing signs of getting away on the RBNZ based upon the detail of today's numbers and the RBNZ will be the first to recognise this. And don't under-estimate the chance of a higher US Dollar over 2014 if the US economy remains the flavour of the month/Qtr, in which case the NZ Dollar will have limited upside even with a few rate hikes
These days the “inflation” in question almost invariably refers only to consumer or wholesale prices. When asset prices are inflated for stocks, bonds or real estate, it is called “appreciation,” or even more confusingly, wealth creation, as if it were not a cost (e.g., of obtaining a home, office space or other site value, or of purchasing a retirement income stream).- Michael Hudson
The mainstream media in NZ is slowly coming round, it has only just started to call 'house price rises 'house price inflation'. I wonder when they will give up and just call it 'Inflation'. I think they will when they understand that you cannot build a wall around housing and not expect the money to leak out to the wider economy. Because until we can actually come to terms with the idea that inflation is everything that is measured in NZD - and not just picking and choosing we will not get anywhere.
The comparrison would be oil. Oil use to be and maybe still is a cost of everything- so when oil went up in the 70s - we said it was inflation and governments could no longer be responsible for the money supply. Now we have property - which is also a cost to every other part of the economy- it is inflation- but government is no longer in control of the money supply.
I think it is really complicated - I wonder if anyone really has a handle on what inflation actually is.
Yes Plan B, precisely. As to "...what inflation actually is" - an awful lot more than the toady's at Stats NZ and the RB would have us believe. I say again that they allowed the money supply to double betwixt 2003 and 2011, in order to inflate house, farm and share prices,along with the demand for credit; this, of course, provides a private happy hunting ground for banks (hence heartlands dash to join up). Mind you many love it all - Bernard and his mate Raf want the RBnz to print funny money into the feeding frenzy even.
Ergophobia
Russel Norman says smart policies, not rate hikes, are needed;
Today’s low inflation numbers show that the Reserve Bank doesn’t need to
hike interest rates, which would hurt exporters and families with mortgages.
Instead, smart policies are need to fix sectors where prices are rising too
rapidly, Green Party Co-leader Dr Russel Norman said today.
Consumer Price Index figures released by Statistics New Zealand today show
that inflation was 0.1% in the December quarter and 1.6% in the past year, in
the lower half of the Bank’s 1-3% target range. The figures reveal that
purchase of new housing and electricity were significant contributors to what
inflation there was. The Reserve Bank has indicated it intends to raise
interest rates this year, which are already high by international standards.
“New Zealand families don’t deserve to be hit with higher mortgage rates
when inflation is not a problem,” said Dr Norman.
“What inflation there is in the economy is being driven by the Auckland
housing market and National’s broken electricity system. The Green Party
has laid out practical steps to fix both these issues.
“The Greens will introduce a capital gains tax, restrictions on foreign
investment in housing, a government-led programme of affordable house
building, and Progressive Ownership for first home buyers to stabilise house
prices. Our NZ Power plan will bring an end to National’s failed experiment
which saw electricity prices rise 3% last year even as demand fell.
“Families are already struggling with stagnant wages and high unemployment;
they can’t afford to pay thousands of dollars more a year on their mortgage
because of higher interest rates.
“Our interest rates are already high by international standards, which is
why our currency is so over-valued. Pushing interest rates higher would just
hurt exporters, widen our current account deficit, and destroy jobs.
“We need smart policies to fix the causes of inflation, not the blunt tool
of higher interest rates that hurts families and businesses,” said Dr
Norman.
We all know interest rates are going to rise.
I dont think it makes much difference if that happens next week or in a couple of months time, or in 6 months time.
Was speaking to a RE agent who assured me, this time is different. We are in a different world now. Low interest rates are forever. Yeh Right.
I think the high NZD/AUD cross is just as much a reflection that the Australian multi-multi-year hard commodity economic boom has noticably slowed ZZ, while our soft commodity economic boom is only beginning...
NZ has always had one of the highest interest rates in the world, regardless of our exchange rate. And if the US and co keeps printing money (which of course they will), roll on parity with the USD.
No I strongly disagree Economist, we're going to turn into a country of savers and investors, fund our own growth requirements and have much lower interest rates as a consequence i.e, rather than us having to pay a premium in the world where individuals here borrow at a level of 150% of household income...........Yeah right ! We will complain and complain about high interest rates, blame those that have little or no control over the level (e.g. banks, the middle men between the borrowers and the saver/investor), and not dare look at ourselves who cause it (in fact not dare to actually even educate ourselves about what determines interest rate levels, rather just shoot the messenger as we don't like the message) .
Well Grant A, I'm all for NZers saving more and funding our own growth rather than borrowing heavily off shore. I don't see it happening anytime soon though, so I won't be holding my breathe.
Why save when the bank will only give me 4.5% at best (less tax, less inflation of course)? Say a real net return of 1.55% p.a. Yeah right! Awesome.
...Maybe property isn't as overvalued as I thought.
Very true, it was a tongue in cheek comment. Of note some on here are effectively saying that those depositors are being paid far too much by the banks for their money i.e. us borrowers can't afford to pay that much, so maybe youre right about your last comment, but maybe wait a year or two until those higher rates coming for depositors result in some cheaper homes to invest in.
"us borrowers cant afford to pay that much"... it's unfortunate that banks don't consult the borrower's household budgets before asking them if they can please put up mortgage rates... (of course ANZ might do as 'they too live in our world').... oh well.
Maybe 'us borrowers', when taking out a loan for repayment over many years should have thought more about likely interest rates over the time of the loan, not over the first couple of years..., is all I can say.
Yep I'd wait a couple of years before looking at investment property, exactly my thoghts, although I can't see it coming down much, more leveling off, unless 10,000's loose their jobs and interest rates went up, which is unlikely.
Fantastic News, Inflation needs to increase for the benefit of all.
Strong economy = strong inflation = happy citizens.
If 1.6% inflation can help our economy so much, why not push it higher to 3 or 5% inflation.
Inflation is great as it reduces the cost of mortgages, and reduces the purchasing power of savers and pushing them to spend, which helps the economy which helps everybody.
RBNZ should cut OCR and helps our exporters as well as push up our inflation for the benefit of all.
China has inflation like 4 or 5% and look how fast they are growing, we should mimic them by pushing inflation up.
without a strong economy how is there going to be any local funds/equity to buy/investing anything?
Normally as soon as there's any sign of segment growth inside NZ (outside of auckland properties) then RBNZ threatens and/or stomps on it. Must. Not. Have. Success...
Cowboy that's a touch mispresenting history. There's been plenty of times in the past when the economy's been going well and people have had ample opportunity to save/invest, but truth is what happens in those times, they feel confident, get greedy and borrow even more. So what youre suggesting is that theres never a good time to save ? Savers save first what is required, and adjust their standard of living to accomodate that.....not enough NZers have that strength compared to the more fugal and savings oriented countries (i.e. the ones that own everything including alot of our assets). Truth is its always time, we just refuse to adjust to accomodate it.
Gummy facts are though that there hasn't been a positive CPI for the Dec quarter is 6 years and to get one is a surprise to markets, and particularly the RBNZ which is all that counts really. Their models had calculated on a -0.2% number and now it's 0.3% higher than that. And their models are telling them that without a rate rise the leading inflation indicators tell them that we're heading back through 2% this year and threatening quickly their 3% upper band. With lag time of up to 18 months in what OCR rises can do to impact inflation levels, this is quite a negative surprise to them in their models and has connotations for interest rates. Probably doesn't change anything dramatically, rather just further targets the first quarter for rises, but anyone thinking second half of the year, or not at all, is in for a surprise barring some external factor hitting NZ in the next 2-3 months.
Guy's please tell me - how do you have inflation when wages and unemployment are static? Doesen't this simply mean the CPI is not broad enoough or is not a robust enough instrument in of itself? Maybe that people had saved money to do a bit more in the holiday season hence we have a modest spend increase in the quarter? If anything I see consumer goods getting cheaper with only the regulated aspects increasing - presumably this justifies a minimum wage hike? I doubt it? What about all the small business owers and self-employed people - increasing minimum wage is inflationary more employment is inflationary - higher householder living and interest rates are just monopolies!
This is why we dont have inflation...for 4~5 years.
So, look at where the inflation is, eg international air fares? just how does raising the NZ OCR bring those down?
Building costs are up because of Chch? yeah OK, hardly that surprising.
So with the same amount of wage in a wallet and some being taken out for more expensive essentials how does raising interest rates help? it doesnt IMHO....it just makes the imbalalce worse and that leads to a tip over.
So its not inflation its an increase in cost, or push inflation and not pull inflation....few see (or maybe want to see) that I think.
"If anything I see consumer goods getting cheaper with only the regulated aspects increasing" - agree.
"presumably this justifies a minimum wage hike? I doubt it?" yes I suspect so actually, as the push inflation hammers the poor the most.
regards
The interest rates are so high to stiff savers when things get bad. So they did.
If there was no interest when things were good, then those people who had over borrowed for houses would not have something to complain about.
They would be totally broke. In America they were, in their thousands.
There is an element of reserve in fractional reserve banking. They count on only a few people reneging on their loans, not heaps.
If there is nothing in reserve, predermined by Central Bankers, then idiots could not extend their loans and leverage up, at the expense of the Savers, using QE and money printing to extend the life of the morgtgages for the heaps we build and badly maintain.
It is this element of borrowing, that sustains and makes the money go round.
If the money does not go round, people cannot return it to the fold.
If the money were totally taken out of the bank by the Savers, there would be nothing left in Reserve.
This is what should have happened, when idiots over borrowed.
But the Central Banks in their wisdom, decided to print and borrow their way out of trouble, instead.
Money is now not worth having, so do not complain about a little interest. It may be some old ladies bread and butter.
A run on the Banks would be unsustainable, more so here as no real assets to hand, only houses. These we sell to Overseas Buyers.
http://www.stuff.co.nz/world/asia/9638203/Off-shore-tax-havens-of-Chine…
It is all based on the confidence of the money go round.
Banking is one big confidence trick, especially today. We now even import scams from Asia and the UK and America.
Some people will do anything for money, I like to call them Financial Whizzes, as they now piss over everything they touch.
This is the simple version for simple folk.
keywest - please be careful not to be mislead by a couple of posters on here who have repeatedly shown a total ignorance as to what determines interest levels in this county. Banks are a minor part of the picture as all they do is apply a margin over their cost of funds and that determines the rate you pay - and naturally banks will always pay the minmum they can for funds as any business would. In the case of the floating rate their cost of funds is not the OCR at 2.50%, as they can not borrow at that level, but rather what they have to pay for deposits either locally or offshore (in the 4.00 - 4.50% range currently). The current level of bank margins is globally competitive because NZ is currently a very strong and aggressively competitive banking market because credit quality is still good here and they're not scared to lend as is the case in the likes of the US and Europe. - your real question is what determines their cost of funds ?
Other informed people on here can expand more on this, but in simple terms, with the floating rate its the RBNZ's perception of the outlook for inflation in terms of its mandate with the Govt to target 2% and inside opf a 1-3% band. But remember with a lag time of up to 18 months that it takes monetary policy to impact inflation (i.e. dampned down some parts oif the economy), it is future inflation that their models are forecasting which is important, not just the current rate, a mistake that one or two make in comments here. For fixed rates, its the global money market that determines NZ's long-term rates as the base rate that the banks apply their margins to for these is swap rates i.e. its the appropriate swap rate plus their funding spread they have to pay to the market, plus their own credit margin..
Swap rates trade on a number of factors; where the OCR is forecast to trade over the fixed period (by the market not economists who are always irrelevant), the perceived credit quality of the country (in NZ whilst Govt debt is comparatively low household debt at close to 150% of household income is very poor), supply and demand (when there are more borrowers hedging and pushing the rate up, than investors hedging pushing it down (classic is when retail mortgage holders panic and rush to fix - lesson being, be early not late), it will go higher; the size and liquidity of our money markets (if in exiting an invested postition in the NZ market a investor pushes the exchange rate against itself in small illiquid FX market then it will expect a premium rate to cover this risk to invest in that country.
The big one of all those is NZers indebtedness - if we self funded our banks by being savers and investors our level of interest rates would be much lower and more in line with other developed countries...unfortunately NZ households aren't Japanese, we're big spenders, mainly on houses for all the reason discussed on here repeatively, and we pay the price for that though higher interest rates than otherwise. At least the Govt is doing a good job on the debt level which assists in lower levels, but its going to take a major seachange in our attitudes towards housing if households are going to join them.....you can't have your cake and eat it too, markets won't let you.
I'll leave you to bedate question the deniers on here.
OK great...and thanks for the detailed response...what your saying is that NZérs dont invest enough in business / save enough and instead lock too much into housing, boats and credit cards. Hence to compensate we have higher rates than the global norms as we have an imbalance on investment. Also cost of funds is higher. however I know for a fact that banks will give you 0.9% off the floating rate right up; if you are big enough - say over 2 million residential borrorer 4.85%....so the banks do have fairly thick margins (am sure most thought banks margins were 1% or something) just a thought and i do get a disocunt on my portfolio....feel sory for those that dont negotiate rates (that was me 10 years ago...!)
Key west - banks have two prime KPIs, market share and margins. Ideally they want a superior market share coupled with good margins that they're comfortable with, but both rarely go hand in hand for very long as it's too competitive. Even over a year a bank will its slash margins to get their market share up (I've seen them do business at negative margins in doing that at times), and at other times when they have their market share they want, they will push their margins back to pervious levels and just concentrate on trying to maintain that market share.
So yes you're right there are times when if you're a good credit and have a sizable deal, you will be able to negotiate a really really good deal if it's their market share focus time, other times not so. Business lending is very individualised down to the quality of the individual transaction, but as a guide looking at the more vanilla mortgage market, bank margins by my reasonable informed calculation are currently ranging between 0.90 - 1.25% depending upon the time and whether we're talking floating or fixed. They have been lower pre-GFC when it would have been nearer 0.70% - 1.00% but then that was when the housing market was less heated and their risk models telling them that they could price cheaper. So shopping around to find the "market share focused bank" at that time is always worth the effort. Hope this helps.
There's an example of a borrower with a 70-80bps margin above to prove the point. I for one never purchase a large item (mortgage is about as large a cost as any) without haggling on price. Those that don't probably aren't doing themselves a favour - the supplier can always say no, but in a highly competitive market like this banking one, they'll generally bend rather than lose the deal, no surprises there.
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