What should Dr Bollard do tomorrow?
Fran O’Sullivan has an open letter to Dr Bollard on why he should not put the cash rate up tomorrow. She tells him to ignore those who say he has no alternative (which may be aimed at people like me – Fran gave me a reasonable decent bollocking over my attacking Matt McCarten on this).
She also notes that John Key has called for them not to go up, and if one assumes Cullen doesn’t want them up, he has bipartisan cover.
The Dominion Post editorial also calls for Dr Bollard not to put the rate up, citing declining house sales.
I suspect the traders have already assumed the cash rate will go up, and that is one of the reasons for the dollar’s continual climb. However it has dropped around 50 points today which is a lot, so maybe it has peaked?
My personal view is unchanged. It doesn’t matter that Michael Cullen and John Key both want you not to. If as Governor Dr Bollard believes that without an increase, inflation would breach 3%, then he is obliged to put the cash rate up. Inflation is never the answer!
July 25th, 2007 at 4:12 pm
Sorry david, but sometimes, inflation is the answer – it just depends on the question !
July 25th, 2007 at 4:13 pm
“Inflation is never the answer”
Unless the question is “what is the economic term for a general rise in prices”
But seriously, IMHO I think you are a prisoner of moneterist doctrine here David. We have to balance other issues and in this case the cost of the rise of the currency far outweighs the minimal danger of a rise in inflation.
July 25th, 2007 at 4:16 pm
Keep doing what he’s doing then when he’s made what he considers enough off trading forex under a false identity at Interactive Brokers he can happily retire. Sweet.
July 25th, 2007 at 4:32 pm
Reduce interest rates, and NZ dollar will be sold off and go down, and there will be less money for the banks to lend, so inflation is controlled.
Why don’t they do this logical thing?
Well, of course, the problem is the government has to control inflation and the dollar without the lending supply drying up because this government has built our house of cards economy on consumer borrowing.
Either that or adopt the currency oif a real country like Aussie or the US.
Like Maggie Thatcher said in her campaign for prime minister “We’re living on borrowed time, borrowed money and borrowed ideas”.
July 25th, 2007 at 4:41 pm
He should drop the rate by two basis points.
July 25th, 2007 at 4:46 pm
He SHOULD be raising interest rates by 0.25 to 0.5%.
However, if he has been listening to the coded messages and overt suggestions coming from the Minister of Finance, he WON’T.
BTW – wouldn’t it be fun to be able to play currency speculator as Dr Bollard has done – with millions of someone else’s moneY!!
July 25th, 2007 at 4:54 pm
I agree that inflation should be crushed. However, I don’t think we need a rate rise tomorrow to do it. Falling house sales will lead to weakness in the housing market, and in turn retail sales. A strong exchange rate has also allowed firms to improve margins without increasing prices, significantly reducing pressure in terms of core inflation.
Also Porcupine, that liquidity argument doesn’t cut it. There is ample liquidity out in the global market, even if we cut the OCR we will have access to as much liquidity as we want. The key is to use the interest rate to reduce the quantity of money demanded, if we cut rates the quantity of money demanded will increase, and then so will inflation.
Furthermore, if we peg our exchange rate, we give up the only tool we have to control inflation, not a good idea.
July 25th, 2007 at 5:17 pm
Why not follow what the Americans have done- take oil out of the inflation calculations.
Inflation due to oil is something that is relatively unstoppable- no amount of interest rate rises will stop it costing more (except indirectly through exchange rate fluctuations.)
It would be interesting to see if inflation minus oil and housing is above 3%…
July 25th, 2007 at 5:27 pm
Non-tradable inflation (excluding oil and the such) is 4.1%pa, so its pretty high. Although global petrol prices have gone up heaps, our exchange rate has to, keeping the affect of fuel costs on inflation relatively low.
I can’t remember what the non-tradable figure was without housing, it was under 4%pa, but over 3%pa
July 25th, 2007 at 5:28 pm
Cullen has all the other instruments at his disposal to control inflation but the steep rise in the dollar will control inflation in its-self. That probably means interest rates will not go up. But wage pressures remain very high and Dr Bollard has referred to that. And the Government through high wage settlements in the public sector are driving this, as they are in the main – non productive workers. Cullen talks about taking cash out of the economy but that is through taxation from productive people. Paying Government servants more and more is a significant driver of wage cost pressures in the economy. I hope Dr Bollard refers to that in his statement tomorrow.
July 25th, 2007 at 5:32 pm
Bollard should raise interest rates to put an end to inflation.
Fact is that the New Zealand economy has to come to terms with two options: either live with high interest rates as the cost of massive government spending, or else cut government spending, give it to New Zealanders to save and produce more, and have systematically lower inflation and interest rates.
July 25th, 2007 at 6:17 pm
Raise interest rates.
Inflation destroys the value of your business faster than high interest rates.
July 25th, 2007 at 7:29 pm
Um. Silly question. But whats gonna hurt New Zealand home owners more; hiking mortgage rates or dismantling the LAQC loophole and implementing a Capital Gains Tax? The former could make people lose their homes and the latter would merely make renting a bit more expensive.
Has this thought escaped everyone in their rush and enthusiasm for Bollard to JUST DO SOMETHING, ANYTHING and complaints about our high taxes and useless government?
Hows the former shaping up? We’re stuck with the latter until the elections and they obviously know they’ve already “cooked their goose” so theres no point expecting anything from them. lol. What a mess.
July 25th, 2007 at 7:46 pm
The problem with dismantling the LAQC and bringing in a capital gains tax, which in principle I don’t totally oppose, are:
1. Rents would go up massively because at present the tax wrriteoffs and expectation of a capital gain are subsidising rents.
2. Once the social engineers are (back?) in power the laws would be changed to make exceptions
- first include the family home for medium to high income earners
- give exceptions for ethnic groups, community service card holders, beneficiaries, …
- then you have the problem of different house prices so lets say only the first $300K of the family home is exempt
-> result -> more money in the government coffers; consider it done!
July 25th, 2007 at 8:14 pm
I want inflation to be crushed into little pieces as much as the next economist, but I don’t think rate should go up again. Monetary policy hits inflation with a lag, house sales are falling, I think the bank has done enough – as long as they still talk tough.
Tim, I don’t think cutting public servant wages would save the government much (although, I would like it if they got cut
). Cutting government spending would definitely reduce inflationary presure though.
I’ve been doing some work on LAQC’s, and I’m not sure that rents would increase that much in many regions, but it would probably hit the cities. From what I can tell, the claim on depriciation has been changed such that being an LAQC only really suits highly-leveraged properties now. Overall about 1/3 of rental properties are run as LAQC’s, my guess is that a lot of these are in Auckland and Wellington. As a result, if the LAQC system was changed (or ring-fencing introduced), rents in most areas would be held down by competition with free-hold rental properties. However, rents in Auckland and Wellington could rise significantly.
Since rent in Auckland is supposed to be a bargain, and Wellington is filled with overpaid public servants, a rent increase might not cause that much harm
July 25th, 2007 at 8:16 pm
Given the overt political pressure being brought to bear I figure he has no choice but to raise rates tomorrow. If he doesn’t, the idea of central bank independence is pretty much shot and he might as well hand monetary policy back to the politicians.
July 25th, 2007 at 8:19 pm
…live with high interest rates as the cost of massive government spending, or else cut government spending,…
Oh balls. Government spending is 44% of GDP, a mere 3 points up from the OECD average and nowhere near big spenders like the Scandinavians who broach the high 50s.
July 25th, 2007 at 8:21 pm
If I was Dr Bollard I would throw a sicky, yes I know, not very clever but the poor man is doomed either way.
July 25th, 2007 at 8:26 pm
He has to raise, wage pressure is going to come on even stronger as the year grows older. mid to lower kiwi’s are starting to struggle. Kiwi saver will add wage pressure too.
Credit Card spend is UP, but retail tells a different story. Big car sales down, small car sales up. Clothing and footware down, food up. People are substituting like mad out there. Putting more on the CC’s to stay above water. When one third of all NZ mortgage reset by average 1.2% this year ouch for retail (I think the avereage increase on the average mort will be $125 ish per wk) Petrol is inelastic, you have to buy it regardless. food is slightly elastic but not very, you gotta eat.
I think bollard will crush housing, he has been warning us to reign in for 2 years. His mandate is so narrow he has no wriggle room, 2-4% inflation is the biggest joke on the consumer they are feeling 10% plus some.
RE: rents and LAQC, do LAQC have a time limit and claw back? Rents are sitting around 30% of average wage, Landlords will struggle to break out of this, rise at your peril if you are highly neg geared. you will compete with non geared rentals and substitution again, kids move back home.
I work in Housing and buyers are being very cautious in the marginal suburbs auckland, we have noticed a change in the zeitgeist.
July 25th, 2007 at 9:06 pm
what should bollard do? yous joke farra,
he resign, it too late,
crisis here,
watch Winston move,
July 25th, 2007 at 9:12 pm
Bollard should ignore politicians, because the latter never want rates to rise.
Inflation is a constantly-accumulating corrosion of income and savings particularly for the most vulnerable. Any lefties advocating a rates-hold are, in the long run, condemning those they profess to care about, to lower standards of living.
July 25th, 2007 at 9:30 pm
Porcupine Says:
July 25th, 2007 at 4:32 pm
Reduce interest rates, and NZ dollar will be sold off and go down, and there will be less money for the banks to lend, so inflation is controlled.
Why don’t they do this logical thing?
Well, of course, the problem is the government has to control inflation and the dollar without the lending supply drying up because this government has built our house of cards economy on consumer borrowing.
Either that or adopt the currency oif a real country like Aussie or the US.
Like Maggie Thatcher said in her campaign for prime minister “We’re living on borrowed time, borrowed money and borrowed ideas”.
Jim D Says:
July 25th, 2007 at 9:31 pm
you donts dumb piorcupine
July 25th, 2007 at 9:44 pm
Charlie:
$20 billion more in government spending in seven years, and $3 billion more each year is the record of this shoddy government that is risking inflation at unsustainable levels, and draining resources from the private sector.
We can’t have significant, long-term sustainable growth until we raise productivity. Productivity growth in the public sector has flatlined. The public sector simply cannot generate productivity growth, despite everything the socialists claim. It simply doesn’t work.
If the Government had saved every dollar of additional spending instead of blowing it on its friends, we would be a far wealthier country than we are today. Labour has blown the fruits of otherwise strong economic times by playing fast and loose with taxpayers’ money.
We do need a much stronger savings culture in New Zealand. The government could start by throwing all the SOEs into the Cullen Fund, and then individualising the Cullen Fund into personal super accounts.
The Government could then choose to spend not a cent extra over the next five years, and making no additional spending without prioritising existing spending.
That’s what a responsible government that wants to encourage New Zealand to create wealth would do.
July 26th, 2007 at 3:06 am
LOL, I seem to remember a certain David Farrar saying that Bollard would have to put rates up to show he was independent of political interference.
It seems that DF puts his own future patronage (and maybe political future as well….?) ahead of the interests of all those battlers out in the mortgage belt.
Shameless, utterly shameless.
[DPF: Sean you owe me an apology. In this very post I state that Dr Bollard should ignore John Key and put the OCR up if he thinks it is necessary. That is the very opposite of putting any mythical future patronage at stake. In a previous post I also criticised John Key for stating what he thinks Bollard should do. So please hurry up with that apology]
July 26th, 2007 at 7:23 am
Resign