A 50 point drop

September 11th, 2008 at 10:33 am by David Farrar

The Reserve Bank has dropped the cash rate a full 50 basis points from 8.00% to 7.50%.

Governor Alan Bollard said: “The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.

I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.

I also remain concerned that will remain too high for years to come.

Tags: , ,

42 Responses to “A 50 point drop”

  1. PhilBest (5,120 comments) says:

    DPF. “I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.”

    You said it. Isn’t this depressing, as if the legacy of 9 years of scorched-earth socialist regime profligacy wasn’t enough, we have a wordwide financial downturn happening at exactly the wrong time. Maybe some revenues from some new Oilfields might be an unexpected windfall? Here’s hoping.

    Come to think of it, if the Heleban has some inkling of something like this in the wind, won’t they be desperate to be the lucky Gummint when it happens?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  2. Alan Wilkinson (1,850 comments) says:

    “I also remain concerned that inflation will remain too high for years to come.”

    You are worrying about the symptoms but not the disease: exodus of talent, bureaucratic excess, subsistence level disposable incomes, rigor mortis over innovation and development.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  3. dime (9,682 comments) says:

    course Cullen has no influence over the Reserve bank…

    kinda wished i bought more forward cover when it was nudging US69 cents the other day.

    any experts out there? think the kiwi will bounce back? 65.5 today..

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  4. getstaffed (9,189 comments) says:

    Alan, I’d have given you 5 karma’s for that comment if I were able. Spot on.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  5. NeillR (350 comments) says:

    Alan while i agree with what you’re saying, imo Bollard has been an incompetent governor. He failed to act early enough and strongly enough and has seemed to be anything other than “independent”.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  6. Hagues (711 comments) says:

    DPF. “I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.”

    I’m sure Sir Roger wont mind the job.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  7. alex Masterley (1,502 comments) says:

    Not only is the cupboard being emptied it’s being dismantled as well.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  8. PhilBest (5,120 comments) says:

    You know, there is a strong case to be made for the root cause of the current financial crisis and downturn, being the trend in the Western world in the last 20 years or so, to restrict the use of land for housing development. I have been following several analyses of this for the last year or so and I must say that I am not impressed with the widespread denial in the “mainstream”, on this point. There are several reasons for this. Conservation of land has become like an article of religious faith. So many institutions futures depend on perpetual inflation of property values as “security” for their portfolios. And home owners get warm fuzzies from the on-paper increases in value of their properties.

    A “bubble” gets created in a market when SUPPLY cannot increase to match an increase in demand; THAT is the point at which “investors” get on board, and up we go! Financial institutions increasingly base their loan criteria on expectations that the ‘security’ for mortages, the properties themselves, will continually inflate in value; so that they get more and more daring regarding who they will lend to, on what collateral, and on what income backup.

    What causes the bubble to burst, is that even on the most risky finance schemes being offered, the majority of FIRST HOME buyers eventually drop out of the market completely, and the market ends up being restricted to people both buying and selling. When the slowdown becomes noticeable, investors all start “selling” and down we go again!

    When the bubble “bursts”, you suddenly have a whole lot of lost equity all through the financial system, don’t you? The first thing that happens? Calls for taxpayer-funded bailouts of the biggest institutions. Frankly, financial institutions need to be made to earn their bloody lesson from this, so that they cease to become willing participants in this process, and actually base their activities on responsible analysis in future. The same goes for the Real Estate agents who love property inflation and the Local Authorities who derive fat fees from the process, and the property speculators, and even homeowners who resist market reforms because it might affect their capital gains. All these actors need a severe lesson, and a collapsing market would serve as the best lesson for the lot of them.

    Meanwhile, productive sectors of the economy have been starved of investment funding because it has all been chasing the property bubble. (Even the construction of new houses has been negatively affected, although had “supply” not been restricted, that is where the money, in the right quantity, WOULD have gone).

    Notice how our current “establishment” is considering every measure EXCEPT freeing up land supply. Capital Gains taxes; changing the rules on interest deductibility; bailouts of financial institutions; the government taking equity in homes; forcing developers to provide a certain percentage of cheaper homes. All this is depressing, “economic illiteracy” stuff. We are talking here about increases in land supply of the extent of allowing urbanisation of our total land mass to go from 1.6% to 1.8%, for Petes sake.

    You’d think we’d be interested in investigating what WORKS in other countries. Germany, for example, is 15% urbanised and yet their whole system is structured so that land development is allowed to proceed at a rate that keeps average property values down to around 3 years average income, which is roughly how things were for our parents and our grandparents – until the anti-human “conservation” agenda hijacked the process. Note that the crisis that has been so prominently featured, that of the USA, is actually mostly being driven by those States which had the most restrictive land use policies; especially California. But because of states where the restrictions are not so severe, the average for the USA as a whole, is that an average property costs 4.4 years of average income. And they’ve got a “crisis”? If our equivalent figure is 6.5 years, what does that say about the distortions that need to be shaken down out of OUR financial system?

    Do you think that one day, economic history books might actually describe all this honestly? I don’t know what the “answers” that those textbooks will say that have been “found” to solve this problem if not that of land supply; all the other proposals merely stave off the final reckoning.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  9. side show bob (3,660 comments) says:

    Bastards!! I just fixed a loan last week for two years after my bank manger give me a heap of dribble about interests rates staying high and they where giving me a good rate, out of the goodness of their hearts of course. The young lady ( the bank manager ) went on to say how much the banks had to buy money for, the poor bastards, it just about had me crying.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  10. labrator (1,849 comments) says:

    Dime, I’m no expert but I am concerned about what will happen when the carry trades unwind. Will this be the catalyst for a mass exodus of NZ dollar holdings? If so, don’t expect mortgage rates to drop and expect everything to get really expensive.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  11. Alan Wilkinson (1,850 comments) says:

    PhilBest, you are completely right.

    Not only do the nutcase-level conservationists enforce totally counter-productive constraints on land-use, they then complain about the inevitable consequences: unaffordability, lost public access, appalling public design and usability, stereotyped rigid development.

    Instead of appropriate sites being intensively developed into a social, human community the entire countryside is chopped up into 10 acre blocks which only millionaires can afford and access.

    The morons have taken over the asylum.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. getstaffed (9,189 comments) says:

    labrator – I’m no expert either but Japanese carry trade redemptions, combined with our (diary excepted) poor productivity economy, could be catastrophic for the NZD. Think there’s a precedent here with Iceland. I’m having a quick look now.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. Alan Wilkinson (1,850 comments) says:

    Side show bob, you must have been listening to Bernard Hickey?? You should know better. Just look at the decline in interest rate the longer the term loan – it was obvious what the banks were really expecting.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. kiwipolemicist (393 comments) says:

    DPF: I also remain concerned that inflation will remain too high for years to come.

    The reason that we have inflation is that in 1934 we moved from a gold-based currency to the current Reserve Bank system, which allows the government to print money at will. Printing money causes inflation. With a gold-based currency there are only minor fluctuations in inflation/deflation and exchange rates.

    http://kiwipolemicist.wordpress.com/2008/08/16/why-isnt-the-governments-monetary-policy-working/

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. dime (9,682 comments) says:

    prices are definately going up. we have had price increases from our factories of 25% this year. the high dollar has kept us in a false economy.

    long term i’d be happy with .65..

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. freethinker (686 comments) says:

    labrator/Get Staffed
    I recall Tony Alexander from BNZ saying a recent bulletin or was it on Radio, that this year carry trade reinvestment was running at 10% of redemptions, also recall a figure of 40 Billion outstanding so if 10% reinvestment was to be the longer term level we may see the kiwi$ closer to 40c – again.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. freethinker (686 comments) says:

    Dime – like many other business’s I no longer care about the inflation my prices may cause looking at the government and public sector increases I think sauce for the goose etc. Pity is it looks like Bill English will get the Chalice poisioned by the Helleban, still at least he will be able truthfully to blame the result on them. On the other hand if John Key does manage to grab defeat from the jaws of victory then my retirement will be on the Gold coast which if the kids join us – very likely, will leave NZ tax & skill poorer.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  18. dave strings (608 comments) says:

    PhilBest

    Thanks. Good on yer for that analysis.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  19. labrator (1,849 comments) says:

    Freethinker, I totally agree with your 40c target. Things could get very very scary here if the, to used a now over used cliche, “perfect storm” arrives. We can thank the Reserve Bank act for all of this and it was preditable and was predicted. If you are in farming though, good times ahead.

    Getstaffed, I’m interested in any links you may have. Always keen to read more.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  20. BlairM (2,307 comments) says:

    This is crazy stuff from Bollard. Brash would never have allowed it.

    At a time of global recession, we are shoving up inflation, devaluing our dollar and making ourselves poorer. It’s madness.

    As a monetarist, I am against dropping the OCR for any reason, but if you are going to drop it, it should be when inflation is at 1%. Remember those targets that come with your job Alan? You haven’t met them for some time now have you? When are you going to do your job properly Alan?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  21. Alan Wilkinson (1,850 comments) says:

    “As a monetarist, I am against dropping the OCR for any reason.”

    ??? Why ??? Is 8.0% is God-decreed perfection?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  22. getstaffed (9,189 comments) says:

    BlairM – I think we can confidently say that this is a politically, rather than economically, motivated revision. Brash would have been nobody’s puppet. Bollard?!? Well let the readers decide…

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  23. gd (2,286 comments) says:

    Side show bob I wouldnt worry too much I dont see the banks dropping rates as much as the OCR suggests Reason banks need cash to lend it out And there aint a huge pile of it lying around

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  24. llew (1,533 comments) says:

    I dont see the banks dropping rates as much as the OCR suggests

    You should be on Sensing Murder – how much of a drop does the OCR suggest?

    http://www.stuff.co.nz/4689040a13.html

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  25. NeillR (350 comments) says:

    He failed to act early enough and strongly enough

    I’m just wondering if my words have been misinterpreted – i meant in regard to raising interest rates in the first place. I don’t believe he should be easing at this point of the cycle and certainly not by 50 basis points. Not when headline inflation looks like topping 5% and food prices are rising at the fastest rate since the last Labour government.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  26. BlairM (2,307 comments) says:

    Alan – the OCR represent the price at which the RBNZ creates money out of thin air for its “customers”. Hence I believe the rate should be gradually raised to the point where such money becomes uncompetitive with investment from real wealth.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  27. dave strings (608 comments) says:

    llew
    I’d put my money on the banks dropping no more than 30 basis points!

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  28. llew (1,533 comments) says:

    I’d put my money on the banks dropping no more than 30 basis points!

    Ok – can someone explain to me then the co-relationship between basis points & percentages?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  29. labrator (1,849 comments) says:

    how much of a drop does the OCR suggest?

    While credit was cheap, banks ran on wafer thin profit lines to stay competitive and as such mimic’d the changes in the OCR with their cut. So, a drop in the OCR of 0.5 would indicate the banks will do the same, which most of them seem to have done. How long this is sustainable is beyond me. If the dollar drops, which is highly likely to the profit margins in carry trades getting punished, then the ability of NZ banks to repay their foreign sourced debt goes up. Therefore they’ll need to take more profit which is done by increasing the gap between the OCR. So like gd stated, the banks won’t drop their rates as much as the OCR suggests historically.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  30. Hagues (711 comments) says:

    llew “Ok – can someone explain to me then the co-relationship between basis points & percentages?”

    They are pretty much the same thing except “basis points” makes it a bit clearer. eg if the rate is 8% and it gets dropped 50 basis points then thats half a percent ie to 7.5%. But if it was said rates dropped by half a percent then is that .5% or half % of 8% So by using basis points it is clear that it is an absolute not a percentage of the current rate.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  31. llew (1,533 comments) says:

    Thanks Hagues – so isn’t it true to say that (most) home loan rates have dropped exactly as much as the OCR dropped? That’s what I was getting at.

    Or should we expect more or less?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  32. Hagues (711 comments) says:

    Depends on other market conditions and competitors etc. The change in bank mortgage rates do not necessarily move by the same amount and the amount can differ between fixed and variable. For eg Westpac has dropped its variable mortgage rate by 0.5 per cent to 10.45 per cent, but Kiwbank cut 0.36 per cent off its two-year fixed rate, which moves to 8.49 per cent.

    See http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10531526

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  33. Michael E (274 comments) says:

    Cutting the OCR has as much immediate effect on overall household incomes as a 1 or 2 cent a litre drop in petrol – most mortgages are on fixed rates so it will take a year or so for the current round of cuts to take effect. Bollard is effectively trying to predict how the inflation outlook will be in twelve months, and acting now.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  34. heathcote (103 comments) says:

    Side Show Bob

    You need to change your bank manager. If she was unable to see a reduction in rates then she shouldn’t be doing her present job. God forbid, there have been enough signals

    - The RBNZ Governor reduced the OCR from 8.25% to 8.0% at the previous review
    - he signalled at the time this would be the first of several reductions
    - this reduction was the first in five years
    - NZ is in recession
    - there are clear signals of reduced economic activity, including in the housing market
    - Australia reduced its OCR last week
    - market commentary has clearly pointed to an OCR reduction, something your bank manager should have been aware of.

    I am a fully qualified NZX Advisor, and I can tell you that this rate reduction was pretty predictable. Even 50 basis points was not surprising, such is the lag in economic signalling.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  35. OECD rank 22 kiwi (2,820 comments) says:

    Bollard is an idiot. The currency is going to crash and burn. Fine for people like me, it just makes the occasional holiday in New Zealand that much cheaper.

    Bollard has reprieved Winston getting sacked. Hels isn’t going to sack Winston to jeopardise the good news story of a rate cut. Won’t have a material effect on the electorate before election day. It will help damage the economy long term.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  36. Jafa (37 comments) says:

    Does make you wonder just how independent Bollard is when he drops by 50 base points just before an election. Anyone remember how he refused to put up rates in 2005 while HC pranced around saying how a vote for National would put interest rates up by Xmas. As I recall it Labour won the election and interest rates went up, well, by Xmas funnily enough. Dont underestimate how corrupt this bunch are and how supposedly neutral public servants have all been appointed on the basis of being loyal to Labour.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  37. NeillR (350 comments) says:

    Not only that, Bollard’s now telling the banks to :cut their interest rates and fast. Cullen’s poodle has lost all credibility.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  38. getstaffed (9,189 comments) says:

    Bollard is no toastmaster, but when I watched him on TV3 news last night he looked and sounded uncharacteristically unconvicted about this rate cut. Actually he looked downright unconfortable.

    As NeillR observed, telling banks to move quickly (which is highly unusual) suggests that he’s in Cullen pocket. Also note the that paragon of state banking independence (!) Kiwibank was given the limelight to show rate cuts immediately after the cut.

    This reeks of political manipulation. Are there any senior public officials that Labour doesn’t have strings, or worse dirt on?

    We are being played for fools.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  39. PhilBest (5,120 comments) says:

    Yes, GetStaffed, I often wonder the same thing myself, especially about the Cops……

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  40. expat (4,048 comments) says:

    Afraid I agree with Al Wilk.

    The bank economists are pissed because they were wrong, theyve cost their banks money in fx positions and they’ll have to pass on 50bp to the punter cause its blindingly obvious whereas 25bp could have been crapweaselled away as “global credit crunch, cant pass it all on”

    The dollar was going to fall anyway so nada credence to the ‘dollar is f*cked” argument, it already was.

    Given the global recession is well recgnised in europe and the us now, it makes sense to get the kiwi back to a level where export revenues can help the economy ride out esp since oil is falling v USD.

    And house price inflation is dead.

    And bollard has screwed over some of the carry traders who have been strangling nz for the past 10 years.

    And probably got the RB funds back in healthy shape.

    Nice surprise attack by Bollard, job done.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  41. OECD rank 22 kiwi (2,820 comments) says:

    Negative growth for the first three quarters of 2008.
    Labour and Hels in control of Government for the first three quarters of 2008. A nice link between the two.

    Lets see if there is synchronicity between the last quarter of 2008 and a National/ACT government. The turnaround starts on 8 November.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  42. expat (4,048 comments) says:

    Alex James from Blur co-wrote the vindaloo theme song for the last-but-one soccer world cup – can we get a kiwi musician to write one for Hulun and Mikhaels departure?

    Themes?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote

Leave a Reply

You must be logged in to post a comment.