Interest rates already rising
The Dominion Post reports on how interest rates have risen around 0.5% since the budget. Home Owners not happy.
The most hilarious part was this:
On Sunday, Dr Cullen accused banks of talking up tax cuts as inflationary out of self-interest …
Is this the same Dr Cullen who for several years attacked tax cuts at every opportunity as being inflationary?
The same Dr Cullen who cancelled the chewing gum tax cuts last year on the basis of them being inflationary?
You can’t have it both ways.
My position remains the same – it is the combination of both government spending and tax cuts which has an effect on inflation – and spending tends to have a greater effect as a portion of tax cuts will be saved.
No TweetBacks yet. (Be the first to Tweet this post)
Tags: Interest Rates, Michael Cullen, tax cuts
May 29th, 2008 at 7:46 am
It’s simple really. The market was expecting tax cuts of some description. But interest rate reductions were expected due to slowing growth, and factoring in tax cuts of some description starting April 2009. Lower interest rates were never on the RBNZ’s agenda anyway because it is lower INFLATION that delivers lower interest ates, NOT lower growth (Take a look at the Bank of England’s recent comments on the topic).
Anyway, when the tax adjustments were announced, and traders realised that they would happen starting October 2008, not April 2009 (propably naive to think that anyway in the first place), markets adjusted their cash flow analysis and their thinking to interest rate cuts pushed forward into next year, and whoila, interest rates lifted back to where they were 3 weeks ago and the NZ dollar rallied.
To be fair, tax chnages usually take place over a new tax year, and it is unusual to change mid year, as it causes all kinds of hassles for everyone, including the IRD…… but this government is desperate.
May 29th, 2008 at 8:00 am
oh dear, profligate fiscal management leads to interest rate rises, who knew?
perhaps once fast forward, the railway, the increases for MFAT and all the other padding in the budget are cancelled, we might see a bit of a rate reduction?
(of course in translation – one mans padding is another socialists “essential services”? last night we got told by Cath Wallace, apparently with a straight face that DoC administrators are vital services)
May 29th, 2008 at 8:17 am
So let’s assume for a minute that the Cullen tax cuts are ‘inflationary’ and this pushes up interest rates.
Why is it that interest rates have been raised NOW but the tax cuts will not happen until October? Am I missing something or are the banks just taking the piss?
May 29th, 2008 at 8:27 am
Thats what I wondered Rocket Boy!
And National would cut…ah, erm, ah, y’know, can’t say, but, ah…big tax cuts!
May 29th, 2008 at 8:55 am
Rocket Boy
Milton Friedman explained the drivers of inflation better than anyone.
Courtesy Wikipedia.
There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.
Fox News interview (May 2004)
We have the same situation here where the Cullen has expanded govt spending at greater than the rest of the economy – hence the govt is driving up inflation through the poorest quality spending decisions (e.g. trainsets).
To answer why the interest rates have bounced up now – it is all to do with expectations – the banks were coming around to expect an earlier easing by RB – say even in Aug-Sep – but now thanks to Cullen’s profligacy and desperation, we are paying 0.5% more for money than last week – that’s $500 for every $100k borrowed – about the size of the block of cheese tax cut.
May 29th, 2008 at 9:03 am
You know Dilbertian, I expected someone to say ‘expectations’ was the reason the banks were raising interest rates. It must be great to run a business where you get to set your pricing based on nothing but expectations and there is very little your customers can do about it (banks, oil companies etc).
All I can say is we are ‘lucky’ that we are only getting the Cullen tax cuts and not the Key tax cuts, otherwise interest rates would be have really jumped up.
May 29th, 2008 at 9:29 am
If we ever get to see the Deity formerly know as Key’s tax policy, one could only imagine how much my mortgage will go up.
Funny he’s giving me my money back for some foreign owned bank to take it straight back and overseas.
Sensibly stuff. And I thought more early childcare teachers were important, seemingly some bottom line in a foreign corporate office is more important. Ah I love this ‘choice’ and ‘my money’ double talk.
Tax cuts are inflationary.
May 29th, 2008 at 10:14 am
Paul – tax cuts in themselves are not inflationary – poor quality spending decisions are. The govt and Cullen in particular make the poorest quality spending decisions. They just bought a trainset at a price I would not have paid (inflationary) and refused to sell and take a profit from a plane set (AirNZ) last year. These two inept decisions show how Cullen mis-manages spending on your behalf. If he had not bought the trainset and had taken profit on the AirNZ holding then there was $2bn at least to “pay” for tax cuts.
Notwithstanding the ineptitude of Cullen to run a business, how do you know what the tax cuts are to be spent on? I would argue that people will extract a lower price for their “increased” spending and retire debt quicker (or save). Both are less inflationary than buying overpriced trainsets.
May 29th, 2008 at 10:39 am
‘Deity’ – ha!
I would suggest some people put up or shut up re: the negative karma, ya big jessies!
May 29th, 2008 at 10:42 am
Rocket Boy – banks borrow the money they lend out to people. It isn’t expectations that change their rates, it is the cost of money they borrow.
That cost is set by international markets, and you are right, it is based on expectations. But if you were going to loan money to someone for a couple of years, surely you’d factor in the expectation of what interest rates might do between now and when you get your money back. I guess you need to start by having some money of your own, and also by thinking a little bit about markets as being collections of people like you, rather than thinking of them as some nebulous entity with a mind of its own.
May 29th, 2008 at 11:09 am
Rocket Boy: So let’s assume for a minute that the Cullen tax cuts are ‘inflationary’ and this pushes up interest rates.
What is their to assume? Cullen is giving tax cuts and borrowing to help fund them, as he’s spent every available cent in the economy already. That’s his “super” budget. Of fucking course they’ll be inflationary.
You can contrast this with National who intends to take a more measured approach to spending. (Remember, no increases and no decreases – managing the status quo as they learn what is happening)
But of course, you seem to be lost in the “What Cullen and Helen says is the truth, so there” school of thought.
May 29th, 2008 at 11:24 am
“All I can say is we are ‘lucky’ that we are only getting the Cullen tax cuts and not the Key tax cuts, otherwise interest rates would be have really jumped up.”
You say with all confidence despite not knowing what Keys taxcuts WOULD have been, and not even bothering to think beyond stage one and realise that the spending Cullen announced in his poison pill budget has effectively spent any excess tax revenue.
May 29th, 2008 at 11:57 am
Kimble – The Key tax cuts will be ‘North of $50.00′ which is greater than the $16 to $28 a week Cullen has offered. If $28 a week is inflationary then $50 sure as hell is also inflationary.
Pascal – Let’s wait and see if the Key/English budget includes any additional borrowing to make the budget balance and see who has the ‘poison pill budget’.
Dilbetian – With your great wisdom on how to run the Country (all of it in hindsight) how about you run for parliament?
May 29th, 2008 at 1:20 pm
In “The Great Unravelling” (2005?) Paul Krugman’s columns, from late 2001, predicted high interest rates globally as a consequence of the 2001 Bush tax cuts and resulting monster deficits. He foresaw a housing bubble as the US Fed kept cutting interests rates after the tech bubble imploded. He foresaw a credit crunch when the inflationary deficits ran head on into the debt piled up while money was cheap. He foresaw higher oil prices as producers sought to shield their money’s value from what could only be a fading US dollar. Krugman, an economist who specialises in bubbles, saw this coming 7 years ago…and before 9/11 and the invasion of Iraq, which have made things even worse.
The NZ government HAS increased spending, but did NOT run a deficit. It’s spending real money….so is either not inflationary or not as inflationary as what Bush has done in the US.
What is happening now has very little to do with domestic NZ conditions. Our banks have borrowed a truckload of money from overseas, mainly American, sources and hey have effectively imported the debt / credit problems of those economies into our own.
Inflation and higher interest rates are something we can do almost nothing about locally (without resorting to draconian regulation and exchange controls) other than to ensure we do not run fiscal deficits. The oil bubble will play itself out. Someone(s) is/are having a massive play there. Meanwhile, we pay. Our dollar will be the occasional plaything of mega funds looking for speculative profits, so will have to put up to gyrations there in the year ahead.
No matter who is in government, this is how it is going to go….and the train wreck began when Bush swore his first oath of office….and then proceeded to ignore it in almost every way imaginable.
May 29th, 2008 at 1:28 pm
” The Key tax cuts will be ‘North of $50.00′ ”
Did he say that BEFORE or AFTER Cullens money burning budget? You didnt even respond to this simple question, you are obvioulsy trying to avoid it. Cognitive dissonance.
May 29th, 2008 at 1:43 pm
“Paul Krugman’s columns, from late 2001, predicted high interest rates globally…” “He foresaw a housing bubble as the US Fed kept cutting interests rates after the tech bubble imploded.” “inflationary deficits ran head on into the debt piled up while money was cheap.”
So did he predict high interest rates globally, or low interest rates? And stop me if I am wrong, but predicting people will borrow money to invest in property when interest rates are low is hardly the sort of ‘prediction’ that made Krugmans reputation.
Bush cut taxes during a recession, and this just happened to precede economic growth, job growth, and investment spending. I am not going to say categorically that one thing led the other, but you will be pushing water up hill if you try and claim that tax cuts worked AGAINST the subsequent economic growth.
The other thing to consider is that CORE inflation was very low by historic standard, and may still be.
“The NZ government HAS increased spending, but did NOT run a deficit. It’s spending real money….so is either not inflationary or not as inflationary as what Bush has done in the US.”
Not inflationary and not AS inflationary are two completely different things. You cannot argue them both in the same sentence.
“Inflation and higher interest rates are something we can do almost nothing about locally…”
Perhaps you tell us why non-tradable inflation (which has been outrunning tradeable inflation for years) is somehow nothing we can do about locally. Without a measure of CORE inflation NZ will be difficult to analyise, but tradeable inflation is still a good stat to give you an idea of the source of overall inflation.
May 29th, 2008 at 1:43 pm
Rockey Boy – how about YOU rebuff what looks to me to be very sound reasoning, instead of deflecting like that
May 29th, 2008 at 3:30 pm
Oh, and the tax cuts wouldnt have lead to a deficit if Bush hadnt simultaneously massively increased spending.
But then again, you guys think all spending is necessarily good and NEVER influences inflation. You dont admit it but you obviously think they government is better at spending people money than they are.
May 29th, 2008 at 4:57 pm
Income is inflationary, as such, Labour should introduce 100% income tax and then decide what you can and can’t buy as Labour spending isn’t inflationary.