What the RBNZ's OCR decision means

Bernard Hickey looks at what the RBNZ's statement on the OCR means for interest rates, the exchange rate, the economy and the housing market

24th Apr 13, 11:54am by Bernard Hickey

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By Bernard Hickey

The Reserve Bank of New Zealand has again held the Official Cash Rate (OCR) at a record-low 2.5% as expected, and has signalled it will leave it there until at least the end of 2013. See more in our earlier news article here.

It appeared to water down its warnings about a high New Zealand dollar, reducing the likelihood in the eyes of some of a rate cut to bring the currency down.

The bank again noted its concern about house price inflation, but held back from repeating previous warnings it may have to hike interest rates to cool the market. The Reserve Bank is currently working on a set of so-called 'macro-prudential' tools to slow the housing market without hiking interest rates.

These tools could include limits on high loan to value ratio loans (LVR), increased capital requirements for banks issuing mortgages and higher capital requirements for high LVR loans. But the bank has said they are unlikely to push up interest rates much or slow lending that much. The bank and the government are working on a framework for using the tools and expect to announce it around the middle of this year, with the potential for introducing them towards the end of 2013. Reserve Bank Governor Graeme Wheeler has previously said he is reluctant to use the tools, and the government has also expressed scepticism about what such controls would mean for first home buyers.

My view is the Reserve Bank will use any such tools slowly, sparingly and without conviction.

What does this mean for rates?

The Reserve Bank said it expected to keep the OCR at 2.5% through "the end of 2013" and its last Monetary Policy Statement in March forecast 90 day bill rates, which are a proxy for the OCR, would only start rising in early 2014.

Inflation is below the 1-3% target band and the high New Zealand dollar is keeping inflation under control, as is continually disappointing growth in Europe and the United States. Growth is also slowing in China, which is now the main driver for New Zealand's external sector. Despite massive money printing globally, the extra cash has simply pumped up new asset price bubbles and is not jumping the species barrier into the real economy in a way that would create jobs, wage increases and consumer price inflation. Deflationary pressures for consumer prices (as opposed to asset prices) are dominant.

Bank economists expect the bank to start increasing the OCR from early 2014, and that the OCR would rise around 1.5%-2% over the following 2-3 years, but these economists have been repeatedly warning of sharp and quick increases in the OCR since 2009, and it has yet to happen. Westpac, which has warned the most about fast rate hikes coming quickly, was forced on Wednesday to again delay its forecast for the next OCR hike to March from December.

Floating rates

Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until the OCR is changed, although borrowers can often get cheaper deals through their brokers because the banks are competing hard for business. This means most expect advertised floating rates to remain on hold until early 2014.

The Reserve Bank has forecast the 90 day bill rate would only rise by around 0.5% by early 2015.

Bank economists see the OCR peaking around 4-5%, which suggests a peak for floating rates at around 6-7%.

Fixed rates

Fixed mortgage rates have been relatively stable in recent months and shorter term rates are now at or below floating rates, making the fixed vs floating decision a tough one. Some banks have been nudging short term rates lower in recent weeks because international funding costs have been falling as global financial markets have calmed. Fixed rates depend more on wholesale interest rate moves rather than the OCR and they have been edging lower in recent weeks on further disappointments about a global economic recovery.

The fixed vs floating decision depends on your outlook for the OCR and your personal situation. A flat to falling OCR makes floating more attractive, while a fast rising OCR makes fixing more attractive.

In my view, the OCR is flat to falling because of persistent deflationary pressures around the world.

What does this mean for the property market?

The prospect of lower interest rates for longer is encouraging many first home buyers to borrow and buy, particularly in Auckland and Christchurch where migration and a shortage of undamaged and watertight buildings is putting upward pressure on house prices.

Some new building has started in Auckland, but remains below expected demand from migrants from overseas and from the rest of New Zealand. The government and the Reserve Bank is doing little to force extra construction, slow migration or slow lending growth. Elsewhere in New Zealand, where there is more housing supply and less migration, house prices are subdued.

Massive money printing in the rest of the world is also causing some to squirt outside of their currency zones to emerging markets and those developed markets with interest rates above 0%, few capital controls and central banks that aren't printing money. Some of that freshly printed money is squirting into New Zealand property prices, particularly in Auckland.

What does this mean for the New Zealand dollar?

The Reserve Bank appeared to ease off its warnings about possible rate cuts to drag the New Zealand dollar lower. This saw the Kiwi dollar jump against the US dollar. With US$6 trillion of cash printed by the US Federal Reserve, the Bank of Japan and the Bank of England over the last 3 years, the pressure for a higher New Zealand dollar seems inexorable while the Reserve Bank remains reluctant to intervene in the currency market and is not cutting the OCR.

Mortgage rates

Select chart tabs

Source: interest.co.nz

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35 Comments

by MortgageBelt | 24th Apr 13, 12:14pm 1366762461

Our interest rates need to fall fast, otherwise all we will have left is Fonterra, foreign investors, winz & Super.

by Christov | 24th Apr 13, 12:26pm 1366763200

Um ...a little clarification there MortB...? all we have left is blah ...because what exactly is gone..? I do hope you don't mean Property Industry Bubble Blowing investments...?

Oh God forbid, we'd have to go out and earn a living rather than bank on a Confidence Market.

by fortunr | 24th Apr 13, 3:30pm 1366774200

Our interest rates need to raise fast, otherwise all we have left is just an inflated real estate market with no real economy to support it. Money and investements need to go to real enterprises, not to a parasitic class of real estate speculators. Other prudential tools must be implemented by the RBNZ as well. We need to hit the real estate now with significantly higher interest rates (both short and long term), in order to prevent a disastrous bubble burst: it is almost too late. A significant increase to the real interest rates will also duly reward savers and punish over-spenders. Serious thought should also be given to some form of (possibly temporary) currency pegging, to avoid undue over-appreciation of the NZ dollar - this might be unorthdodox but it has been used successfully in other countries. Low interest rates and money printing are a bankrupt policy that should only be used as a very last resort if there is nothing else that can be done, and NZ is in a completely different situation to other countries that have adopted this desperate measures and that will bitterly regret it in the mid-long term. Forms of improved tax deductibility of business expenses and interest payments on business lonas should also be explored. We need to reward intelligent behaviour (savers and business investors) not dumb short term behaviours (speculators and over-spenders).

by steven | 24th Apr 13, 3:41pm 1366774918

"all we have left is just an inflated real estate market with no real economy to support it"

too late.

I dont fathom why you think hitting the real estate sector with high rates wont burst the present bubble....most strange...

regards

by fortunr | 24th Apr 13, 4:21pm 1366777317

I might well be optimistic, but I do not think that our real estate market has reached YET the stage of a dangerous bubble - so but we'd better stop it NOW before it is too late. It is already clearly inflated, I would agree with that, but I think that decisive action now, whilst creating some unavoidable short term pain, will help prevent a much more dangerous burst later on. I guess you are thinking that it is already a dangerous bubble now, but I would disagree with this: the banks have only recently started some irresponsible behaviours (such as 100% or close to 100% equity lending), but fortunately this is not widespread yet. The same applies to the behaviour of other lenders and borrowers; so I think that if we act decisively now with higher interest rates (together with other measures to support the REAL economy), this will hopefully prevent much more pain later on. Better have some pain now than much more pain later. Flipping houses does not create any real added value: resources must be allocated to the real economy. If we keep the current environment of artificially low interest rates (promoting over-spending rather than saving, and other general irresponsible behaviour), and we keep an environment hostile to the creation of real value through real enterprise, then all we will be left with is, as I said, just an inflated real estate market with no real economy to support it. Unfortunately money printing and artificially low interest rates (which is just a variation of the belief that money grows on trees) do not create any wealth and do not improve the competitiveness of a Nation. Easy money simply hides the real problems and prevents any serious action on the real economy. Only real work, real productivity improvements, real enterprise and risk-taking, and real competitiveness (I know, these are all bad words in the current climate) will improve our wealth in the long term: other options are just a more or less sophisticated lie, just dangerous shortcuts for lazy people and morally dishonest politicians, which will kill the real economy. And we should not forget that low international interest rates will not last forever: and when they start growing again, what is NZ going to do ? Sell more assets, so we can keep selling houses to each other and maintain a lifestyle that we can't afford ? Better a controlled reining in of cheap credit now than an uncontrolled and painful adjustment later on.

by Grant A | 24th Apr 13, 4:34pm 1366778060

Throughly agree Fortunr - extended periods of easy money also screws people living on fixed income (read, pensioners) and forces, indeed is designed to force, people into speculative investments, investments that ALWAYS end badly in those circumstances - how anyone can think that is a good thing is beyond me. There comes a time where it has to be pared back, and we're probably now past that time. The borrowers will never feel ready for it, but truth is, they're had it damn good for a long time, and if they're still needing it, they were incompedent in their "investment" decision in the first place

by fortunr | 25th Apr 13, 9:19am 1366838391

Hi Kimi,

I heard all sort of statistics about the real estate market, but the statistics that I think should be take very seriously are the ones that compare internationally the affordability levels of the NZ real estate with other marlets according to standard indicators. And this indicators scream that there is an inflated housing market. I think here we might have a never-ending discussions about these statistics, but I can also say from what I have seen personally that the prices of real estate in Auckland have reached what I think levels that may not be sustainable in the medium-long term.

I will give you an example, a very personal one: I bought my house in 1999 (a mid-range 4-bedroom house located in a relatively central, middle-class suburb), and I got it valued professionally in 2011: in less than 12 years the values of my house had more than doubled in value! Which is an almost 9% increase in value per annum. And I did virtually nothing to it, just normal maintenance. So, by doing nothing and just by sitting on a non-producing asset, I earned a pretty decent rate of return. Is this real ? Isn't this "wealth" just an illusion ? Why should then I invest in a real business and create real wealth when I can just sit on my butt and earn such nice returns by doing nothing ? I recognise that this is just one personal example, but there are several other such instances in Auckland that I can report.

by fortunr | 25th Apr 13, 10:02am 1366840928

Hi Kimi, thanks for your comment.

- On one hand I am afraid that I disagree that the real returns are only 2% even after factoring inflation, and I also disagree on your comparisons with other countries (in order to analyse affordability, you need to take properly into account the input side too (personal wages/salaries/earnings, which in other countries are significantly higher). And all international comparisons that take into account these factors do rate Auckland as one of the most unaffordable markets in the world.

- On the other hand, I do see your well-developed point about the returns that must be achieved for developers to be able to build. And such developments, when they correspond to a real necessity, are very important to the long term health of the economy (they are quite a different story to the speculative house-flipping I was referring to in other posts). ANd I totally understand your frustration in not being able to proceed with your potential development.

Actually the sad thing about the inflated real estate prices in Auckland is that they did not trigger any signnificant building and development activity.

My point here is that there are two sides to it: on one side is the value you can potentially get out of your development, on the other side there are the input costs that you correctly highlighted (development levies, earthquake strenthening, labour and building costs etc). And these input costs, compared to other countries (just look at Australia) are significantly higher: why are building materials in NZ more expensive than in other countries ? Why are other building and compliance costs in general so much higher ? Maybe because the market is almost a monopoly (thanks to the likes of CHH and Fletcher ?). Maybe because the regulatory environment is killing the building industry ? A long a detailed discussion would be needed here... but I do not think that inflating artificially the prices of houses in order to compensate for the inefficiencies of the supply chain in the industry would solve the problem, it owuld only create problems to the overall economy.

by kiwimm | 26th Apr 13, 10:19am 1366928367

Kimy, you misquote the available statistics on housing. In the long-run, NZ housing has risen at 2.2% above inflation. This includes an overexurberant phase in the last 10 years.

From 1962-2002, house prices rose 1.6% in real terms (the pre-bubble average)

From 2002-2012, house price rose 4.9% in real terms, over 3 times the pre-bubble average.

In the last year, Auckland house prices rose 11.5% in real terms, over 7 times the pre-bubble average.

The point here is: expect a revision to the mean to occur at some point. Based on the numbers above, housing is 43% overvalued compared to the long-run average.

by fortunr | 25th Apr 13, 9:00am 1366837236

Hi Kiwi, thank for your comments, which raised important points. I partially agree with a few or your points.

- I agree that bank crashes are ALSO due to the result of poor lending practises, but we have to be realistic: it is quite a standard situation to have banks (in NZ as in the rest of the world) lending mainly to the housing market; this is normally where the bulk of lending happens in an economy, and this unavoidably exposes them to a potential crash in case it all turns into custard. It is also true that it is theoretically possible to minimise these risks by appyling (even enforcing, if necessary) sound lending practises (by enforcing a LVR no higher than say 70%-80%), but historically these tools have proven not so effective in the past, where they have been tried. So an inflated housing bubble is a serious danger to the financial system and therefore to the whole economy, and the enforcement of sound lending practises (assuming that it can be realistically applied and that it works) does not eliminate these systemic risks. It is important that potential assets bubbles are PREVENTED by acting on the OCR. But I agree with you that the OCR by itself is not enough, the control and monitoring of the banks' lending practises is quite fundamental as well (and I see worrying signs that the RBNZ, and possibly the government authorities themselves, are not necessarily taking this point seriously enough).

- I am very surprised that you are mentioning a potential risk of "excess savings" in NZ. REALLY ??? Why are then the NZ banks resorting to the international money market for 25%-30% of their lending ? Why did the RBNZ panick when the international money markets froze after the financial crysis, rushing into emergency measures to support the NZ banks access to money ? Simply because there is no enough savings in NZ for the NZ banks to support this inflated housing market, actually not even to support effectively the REAL economy. Try and ask business people how difficult it is to access business lending nowadays: you are virtually guarantee to get money if you are buying a house, but if you are running and especially expanding a business (so creating REAL welath for the REAL economy) it is a completely different story. This makes NZ more vulnerable to the vagaries of the international money market, and this is also why we have a constant and significant account deficit: we keep selling our assets to support an inflated real estate market, therefore killing the medium-long term prospects of real growth in NZ - we are killing the prospects of future growth so that we can keep kidding ourselves by flipping houses and pretend that we are getting richer by doing so, in the process destroying the real economy. Requiring a reduction of the supply of money through less domestic saving would be exactly the opposite of what NZ needs. Keeping an artificially low OCR would only inflate the problem by stimulating the demand for money and it owuld actually make NZ ever more dependent on the international money market - it would be like pushing drugs to children by offering them at a very low price (using your drug example).

- When I mentioned higher savings with higher interest, I can't understand why you are considering them "extremely short term liabilities". I strongly disagree with this, and actually if you look at the average maturity profile of domestic lending to the NZ banks as opposed to the maturity profile of the international lending to the NZ banks, you can see that the maturity profile from domestics investors is significantly longer than the profile of the international lending. There are several forms that domestics lending can take, and standard savings accounts with a very short term maturity profile are just a very small percentage of the total savings. And this is also the reason why the RBNZ has (and I think that they really got this right) imposed to the NZ banks a minimum ratio of domestic funding against the total funding: they did this in order to reduce the vulnerability to the international money market and to improve the maturity profile of the NZ banks overall funding. And on top of this we are not just talking exclusively about banks here: we are also talking about several other ways of employing capital from savings: various forms of investment funds,the sharemarket (bad word, I know), direct investment in businesses etc. Unfortunately the capital markets in NZ are still at a primitive stage, and this reduces the possibility for real businesses to fund through these other channels.

- I also disagree that house price increases are just a direct result of poor lending practices: while poor lending practises may well exhacerbate the problem, no question about this, the BULK of the price increases is directly and significantly correlated to the OCR. Just look at any chart comparing the house price increases with the OCR, not just in NZ but also all over the world. With few exceptions due to particular circumstances, the strong correlation is evident. So the OCR remains the most effective tool to cool down this real estate market before it is too late.

by fortunr | 25th Apr 13, 9:38am 1366839524

I would also like to add that I am not one of those who predict that a disaster will hit us. Not at all. NZ is in an enviable position (compared internationally with other countries), and I do not think that the real estate in NZ has reached a stage where it will inevitably come crushing down, taking down everything with it. Not at all. But I see some systemic risks appearing at the horizon, and they have to be dealt to.

What I am saying is that, by adopting sound practises (including but not limited to a more neutral OCR setting, so to prevent the real estate market from progressively killing the real economy), we need to rebalance the economy NOW by promoting REAL wealth creation and business investment. And if some pain is required in the short term to effect this adjustments, so be it.

We also need to invest in our future; by discorauging savings (as we are doing now with this artificially low OCR), NZ runs the risks of losing its financial independence by selling its real assets so that we can keep flipping non-producing assets between ourselves and so that we can pretend we are all getting "richer" in the process.

by fortunr | 25th Apr 13, 9:00am 1366837248

Hi Kiwi, thank for your comments, which raised important points. I partially agree with a few or your points.

by dh | 25th Apr 13, 5:00pm 1366866042

Could you clarify the numbers and starting point you are drawing from- I can see ultra long term averages being 2%, but the Reserve Bank is pretty fond of quoting Real House Prices increased 80% from 2002 to 2008, and prices never seem to have fallen back into line with GDP since the 2002 divergence. If you started counting from 2008 (so excluding the surge before) you will get very different numbers, as will time periods starting far enough ago that the last decade is down weighted by the period before hand.

by Happy123 | 24th Apr 13, 4:26pm 1366777614

What you seem to miss is that the OCR is a blunt instrument, it effects the whole economy not just house prices. You want to keep the NZD down but at the same time preach a higher OCR. You want people to invest more in businesses but preach that they should instead put that money in the bank/savings. You want cheaper business loans but a higher OCR!

Your post couldn't have been a greater contradiction.

Low OCR will lower the NZD, increase investment and put more money in the middle-classes pockets. A higher OCR is a last resort only for run away inflation. Let Aucklands property market find it's own happy medium, if you think it's too expensive, don't buy.

by fortunr | 24th Apr 13, 5:30pm 1366781404

I think you appear to not have fully read my comments, and miss some parts of them.

I did not talk only about the OCR, but I did also clearly mentioned other related items such as the currency value, and also other instruments that may be used to return the real estate market to more rational values (and that the RBNZ has been exploring in the recent past). Unfortunately these other tools (which in my opinion should be tried) do not appear (at least in the light of what has been tried in the past by other economies, and according to RBNZ) to be a very promising alternative.

I will also repeat again that the interest rates are only ONE of the factors affecting the business enviroment: there are several other factors, at least, if not more important, than just the interest rates: the regulatory environment, the infrastructure, the flexibility and education level of the labour market, the trading relationship with other economies, the diversification of the economy, the taxation regime of the investments (which currently still unduly favours parasitic speculation in real estate), allocation of the resources to real economic activity and real investment, existence of a sound sharemarket, existence of venture capital... and I could keep on and on and on. So things are not as simple as they look. An artificially low OCR does not promote the REAL economy, ONLY ASSETS BUBLES. And this is exactly what has been happening to the economies that have been trying this easy option - asset bubbles with no real improvement to the real economy. It is so clear to everybody who only wants to see the truth - as uncomfortable or politically incorrect as it might be, but true nevertheless.

An artificially low OCR might seem good as a short term shortcut, it definitely appears to be the "easy way out" at a very shallow level, but it is a very dangerous, shortsighted policy that is only going to hide and even inflate existing problems (such as the current inflated real estate market) and it is going to postpone the search for real solutions to the real economy.

And you really scare me when you say "Let Aucklands property market find it's own happy medium" - this is exacty what some American and European politicians said, almost word by word (just change the name of the city to say New York or London), just before hell broke loose in those markets. Very dangerous and naive wishful thinking, which I hope is not shared by many, for the sake of everybody in NZ.

by MortgageBelt | 24th Apr 13, 6:37pm 1366785426

NZ,s OCR is high compared to all other developed countries bar Aus.

by moa man | 24th Apr 13, 7:24pm 1366788252

NZ TWI Exchange Rate Index is also very high. If you subscribe to the idea that the value of a nations currency is comparable to confidence, or share value of a listed company, then it seems a lot of other investors appear to think NZ Inc is doing pretty well with interest rates at this level.

by fortunr | 25th Apr 13, 10:10am 1366841409

Hi Kimy, unfortunately I have to abandon this blog for a few days as I am shortly going on a business trip... just letting you know that I am not ignoring your latest couple of replies and that I have been actually enjoying this discussion :). I will try and reply when I am back.

by iconoclast | 25th Apr 13, 4:02pm 1366862539

KimY says: RBNZ - general incompetence in allowing 26 finance companies to collapse and still in a complete ignorance of the primary causes

Dislexia? or were you typing too fast?

http://www.interest.co.nz/saving/deep-freeze-list - Last count 67

by iconoclast | 25th Apr 13, 6:11pm 1366870315

KimY: I doubt they need a royal commission to establish what went wrong. From my observation the finance coy's were committing the cardinal sin of borrowing very short and providing mezzanine lending for longer periods. When the SHTF those finance companies who had been rolling over debt continuously suddenly found they couldn't roll it over any more. While most of the lending was secured over property and property developments the problem was the rollovers. They were caught with their goolies in a vice. The initial losses were $7 billion excluding SCF. Now after liquidations and recoveries the net losses are now $3 billion including SCF of $1.7 billion and falling. Those dabbling in related-party transactions found the tide went out with a vengeance.

by fortunr | 25th Apr 13, 7:16pm 1366874204

Hi kimi, I am writing from an hotel room so I have to be short, but I felt compelled to reply to this post of yours, which unfortunately left me a bit disappointed (a pity, especially considering that the discussion has been quite good and informative up to this point): I do not think that personal attacks (veiled or otherwise) will contribute to the discussion... your statement that this "for me is just a discussion, but for many New Zealanders etc....) sounds very much like you are saying that I do not care... but I do care at least as much as you and everybody else. I might be mis-interpreting this statement of yours, but whilst I like strong and open discussions, I tend to stay away from discussions where things start to get personal. Feel free to criticize my position in the strongest terms, but that is where it should stop.

I also do not think that general accusatory statements help the discussion: statements like "ill considered remarks, with poor policy decisions because of incorrect interpretation of statistics, for applying wrong tools for the wrong job and for grabbing the wrong end of the stick looking the wrong way" do not help, in my modest opinion: better stick to facts and details if we want to take informed decisions as a Nation, emotional generalisations do not help. We all agree that the RBNZ might have made significant mistakes in the past (but we should also consider that everybody is 100% accurate in hindsight), but we should look at specific points, policies and events.

by Happy123 | 26th Apr 13, 9:17am 1366924631

I didn't mention your other points because I agree with them, LVR restraints, encourage business lending, etc are all good. It's just your comments regarding the OCR that I disagree with.

A few things, a large percentage of normal Kiwis have mortgages and the interest portion of those mortgages represent, by far, their largest annual bill. If the OCR goes up then this bill goes up and more money goes to Australian banks; this is a direct and massive withdrawal from the NZ economy and there's no way that you can spin that to look like a good thing. 2nd, property speculators, they will buy property (or any asset) that is going up in value; cool the housing market and they'll go away. 3rd, the exchange rate of the NZD will go up if the OCR goes up and this will directly and negatively effect our exporters, the very group your proposing to help. 4th, Auckland properties are going up in value because there is a shortage of supply, flood the market with affordable properties and prices will stabilize. Developers (who will fill this supply gap) will only enter the market if they have affordable funding which comes from a low OCR and subsequently cheap borrowing. The less the devlopers spend on interest costs on their loans the cheaper the end cost of the house will be, further reducing the cost of Auckland homes. Auckland is a very desirable place to live so your going to see strong demand and price rises in the long term.

To put it simply, I'm proposing we keep the wheels turning, keep the economy strong and growing but touch the brakes when we need to. Your proposing to slam on the brakes and throw up the handbrake.

by Gloom | 25th Apr 13, 2:36pm 1366857411

The Auckland house supply shortage was caused by so many builders stopped building after Bernard Hickey's 30% house price fall prediction.

The 30% fall prediction not only created today's housing supply shortage and also made so many families sold family home and they will never buy it back again.

by Hevi Groswaite | 24th Apr 13, 3:33pm 1366774399

Praying and hoping...

HGW

by murray86 | 24th Apr 13, 12:27pm 1366763221

Bernard this sort of looks like using sticking plaster to keep the housing bubble inflated? It is almost like they know the market is out of step with our economy (sorry for stating the obvious, although judging by their actions, I'm not sure we can be certain as to exactly what they know) but are afraid to do anything in case they cause it to collapse.

by Wolly | 24th Apr 13, 2:37pm 1366771078

All this blather about 'working on' and preparing for and planning to do....just so much humbug...The RBNZ is dancing to the bank sector tune and the Beehive fools are playing the Fiddle...No change before the election...an early election before any change...

by waymad | 24th Apr 13, 5:05pm 1366779927

BH, to Counter the Current Crop of factless Common taters, this sorta article rilly, rilly needs a Table to show how real interest rates in Godzone compare to the rest of 'em.

Not that it will do much to edumicate the clueless, but, like the RBNZ, is a Hope and Pray action.....

by MortgageBelt | 24th Apr 13, 5:53pm 1366782826

We dont need more 60 to 85 year olds 'saving' their 300k in the bank.

As SMEs have to pay 12 to 14% interest to borrow for their businesses.

Why should banks get 14% while business owners will be lucky to return 3% ?

by notch | 24th Apr 13, 7:21pm 1366788085

It's absolutely outrageous that a household’s single biggest expense is kept out of the CPI.

The rest almost doesn’t matter in comparison to housing!!! Sorry but what on earth are economists thinking?

Godszone is on it's way to self destruction via housing bubbles.

I’ve lost all faith in NZ to govern itself. We are heading for disaster, and we all know it!

by Justice | 25th Apr 13, 9:20am 1366838423

Totally agree. The reasons they purposely leave it out is so profits can be maximized for banks regardless of boom or bust. Imagine the 'real' interest rates they would have to charge to cover the 'real' inflationary effects!

It allows banks to pay out lower than real 'inflation' interest rates back to depositors

It allows CPI fudging so the average (sucker) consumer can continually be sold a mortgage

It allows for annual capital gains figure fudging to continually make housing bubbles look attractive to the next generation of mugs.....

by scarfie | 25th Apr 13, 2:42pm 1366857731

People generally know that are having their wealth taken by tax and for the most part resent it. But they generally too stupid to see their wealth being stolen via interest, in fact so damn foolish they actually embrace it! But you have to admit there is beauty to be found in such a perfect scam.

by notaneconomist | 25th Apr 13, 4:10pm 1366863002

Notch - I think you will find it is "land" that is excluded from CPI. The bulding upon the land is included.

Land was considered as not being a consumable item and a house is.

Land is where the inflation component is.

by notch | 26th Apr 13, 1:07am 1366895242

Fair enough notaneconomist. Still a huge thing to be leaving out.

I think the guys at interest.co.nz need to come up with a new chart entitled "Real Inflation" for the aveage kiwi... Now that would be interesting to see.

by steven | 26th Apr 13, 9:36am 1366925792

I think we have had more than a few discusions on this here.

CPI is a basket of short term consumption and is designed to show weekly "hurt".

Core shows the overall real inflation effect across the economy.

The difference between these is the volitile bit, this is the problem really, housing is in a x2 bubble.

So once a house is bought, the costs to run and maintain should be in CPI, the house purchase should not, rent should be.

CPI, well Ive argued time and time again with the likes of Wolly that tomatoes at $14 a kilo isnt inflation, not when a few months later then are $2.49 a kilo. Just how do you pick inflation out of that? you cannot. This can be argued about housing, its a bubble price. Or that when I buy a TV and its $600 for a better TV v $1200 I paid a decade ago, that isnt deflationary...the fact for the last decade the annual cost was $120 and its now $60. Clothes are now heavily and constantly on sale. I went into K-mart and bought 4 tee shirts at $9 2 weeks ago, went back for 2 more and they were reduced to $5 so I bought 3 and still saved $3 but that isnt deflationary? .....Brisoco's stuff ditto....50% discount is common.

So really what are you looking to get out of this? lets take all the worst inflating things and swap them in and out weekly to show how high we can pretend inflation is?

Then look at the financial gambling thats going on, the Fed lends to the big banks at 0.25% and they buy futures and commodies and could be easily inflating essentials by 10% or more.

Or the fact that we have so much debt that many things are 35% higher than they should be?

How do you factor in these amnipulations or factor them out?

Then what do we do about this make believe inflation? raise the OCR to 20%? that will sure kill main street dead.

regards

by Billy | 26th Apr 13, 3:17pm 1366946234

Do you think it is reasonable to expect mortgage rates to drop below Kiwibank's 4.99% after 2014 or maybe 2015? Trying to decide whether to float or to fix is such a PITA :-)