OCR drops 100

October 23rd, 2008 at 10:04 am by David Farrar

The Reserve Bank has dropped the Official Cash Rate by 100 basis points, as many had predicted.

This is the biggest ever single movement – previous moves had been as high as 50 basis points but never a 75 or a 100 before.

The Governor says:

“With weaker short-term growth and sharply lower oil prices we now expect that annual CPI will return to the target band of 1 to 3 percent around the middle of 2009. However, we still have concerns that domestically generated (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

The domestic inflation is what causes the risk of stagflation.

“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”

I can think of some domestic costs that could be reduced!

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28 Responses to “OCR drops 100”

  1. Redbaiter (13,197 comments) says:

    Economic reality begins its long overdue adjustment to the socialist delusion.

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  2. ross (1,437 comments) says:

    > I can think of some domestic costs that could be reduced!

    What, wages?

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  3. GJ (329 comments) says:

    Now here is a real opportunity to help struggling families. There is a section of the voting public that have never received any help from the Government, yet they have been caught out with these huge increases in the interest rate on their home mortgage.

    The government is willing to stand behind the banking sector, but how about a little help for the family home owner?

    The Family Party has suggested that the government pays the fee to break a fixed rate mortgage so that families living in their own homes can get immediate relief from the current high interest rates that many of them have been locked into.

    More money for families in this manner makes a lot of sense to me. I am not a fan of handouts, but theses are serious times so let’s give a little help for once to those who have worked hard and taken a degree of risk.

    Many NZ families would be far better off for it.
    Check it out on http://wwwfamilyparty.org.nz

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  4. Redbaiter (13,197 comments) says:

    “What, wages?”

    In particular, the wages of Klark/ Labour voting productivity strangling bureaucrats.

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  5. labrator (1,850 comments) says:

    I’ll be interested to see if this causes the NZ dollar to drop even further. If it does, it doesn’t bode well for our inflation targets.

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  6. dad4justice (8,312 comments) says:

    The stupid socialists have sure fucked things up this time.

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  7. gd (2,286 comments) says:

    Watch property prices start to rise especially if the socialists get back and introduce the new 45% tax rate.

    Even if they try and tinker with the LAQCs there are still plenty of ways to aviod the top rates.

    Any one with a brain and investment properties is paying 19.5% tax rate or even no tax and living off the tax free capital gains

    Only when we get a Gumint who sets a low flat rate will we see property lose its favour as the No1 choice of investors

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  8. PhilBest (5,125 comments) says:

    “……However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high….”

    “……However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures…..”

    Ross: “What, wages?”

    You tell me, Ross.

    There is nothing quite so pathetic as socialists and politicians (both socialist and non-socialist) being confronted with economic reality. We will go on our merry way to an actual crash rather than take any politically unpalateable pre-emptive measures.

    I would advance one glaring example of this. Had we allowed housing development to proceed in response to demand-driven house price inflation over the last 9 years in particular, we would not have had a house price bubble, we would not have had mortgages costing first home buyers 70 per cent of their income, we would not have had speculators driving the prices up further, we would not have had increases in household borrowing based on the inflated value of houses as “collateral”, investment might have gone into activities that actually added economic activity to our country, we would have had a thriving building sector providing jobs (instead of builders leaving the country in droves) and local bodies might have gained satisfactory revenue streams from moderate fees levied on lots of new homes and businesses rather than exorbitant fees levied on a measly amount of development.

    So what were the political obstacles to achieving this? Existing home owners (lots of them) who:
    a) didn’t want “the environment” or their views or surroundings scarred by new development
    b) didn’t want to lose the nice little capital gain represented by their house going up in value by 20% per year.

    Guess who understood all this stuff? The man who NZ-ers rejected as their possible next Prime Minister back in 2005. But dear me, no, we can’t have stooges of fat cat industrialists and developers running the country, better to leave things in the hands of bumbling socialists who will lead us merrily on to the inevitable crash.

    DUH. DUH. DUH. “We” deserve all the consequences we now get to reap.

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  9. NeillR (351 comments) says:

    Images of deckchairs and the Titanic come to mind. They can all see the iceberg looming large, but they refuse to steer away from it.

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  10. dad4justice (8,312 comments) says:

    “Only when we get a Gumint who sets a low flat rate will we see property lose its favour as the No1 choice of investors”

    On that matter how many properties does Miss Klark own? Get my point.

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  11. BlairM (2,364 comments) says:

    Ummmmm… what drugs is the Reserve Bank governor taking if he thinks he can lower inflation by lowering the OCR?!

    The whole point of lowering the OCR is to create more credit in an economy. But cheap credit is precisely the problem. In the short term, it stimulates growth, but it always has to be paid back, and in the end you are in worse shit than you were before. With inflation at 5% it will be nothing more than a dead cat bounce. Stagflation is on its way.

    Had the RBNZ governor raised the rate by 1% we would be able to save our economy. While there would be short term pain, oiur dollar would hold up, investment looking for safe harbours would flood in, the housing bubble would burst and people would be able to afford their own homes again, and inflation would come right back down below that magic 3% mark that Bollard is supposed to be fired at. Why is he still there?!

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  12. Gooner (995 comments) says:

    GJ, sorry mate, but that’s absurd.

    Government money is actually my money and that of those around me, and all the taxpayers of NZ.

    I have a hard enough time paying my mortgage costs. Buggered if I’m paying yours too.

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  13. PhilBest (5,125 comments) says:

    “gd” you are depressingly right. I have been thinking for a while that at least if the socialists get back in now, they will clearly and swiftly administer such a death blow to the economy that no-one will be able to deny the abject failure of socialist economic “management”. But I have also been reading reviews of “The Forgotten Man” by Amity Schlaes, about the Great Depression in the USA, and how Franklin D. Roosevelt conducted the following course of policy:

    Raise taxes on “the rich”. Make scapegoats out of “the rich” and “big business”. Introduce tough controls, restrictions and regulations on everything. Provide for the unemployed and unfortunate by government provided welfare. Win election after election without actually fixing the economy or reducing unemployment, by class warfare rhetoric, scapegoating, blaming previous governments, and buying votes with handouts. Keep providing the “solutions” of Robin Hood taxation, income redistribution, “targeted” government spending, growing the size of government, and strangulatory controls on the private sector. All of which the ignorant majority who elect you every time, love you all the more for.

    The same may be about to happen in the USA courtesy of a new “President Obama”. NZ is slightly different in that Mikhael Kullen and the Heleban will find it harder to blame the previous National government, however I must admit I am experiencing new bouts of depression over the capacity for democracies to do themselves harm through mass ignorance. It is frightening just how many people believe that all our problems in NZ are the result of what greedy capitalists have done, and particularly what greedy capitalists thousands of miles away in the worlds “most capitalist” country have done.

    The role of home owners blocking new developments that would slow the rate of house price increase, the role of home owners borrowing against the new inflated values of their home, the role of first home buyers who begged for finance and stretched themselves to beyond breaking point to get it, doesn’t seem to enter into our heads. You might ask me, what should a first home buyer have done? Well, first home buyers ceased to buy altogether in 2007. They should have done this sooner. If we keep participating in the extortion racket that is house prices, we WILL drive it up to the point at which NO-ONE CAN buy no matter how badly they want to. That is when the market starts to unwind, the speculators see it unwinding and all rush for the exit at once, and hey presto, a whole lot of equity gets wiped off the books. You know what else first home buyers should have been doing? They should have been lobbying their MP’s, forming associations, actually Hugh Pavletich has a good one already……a builder can build a cheap new house for around 120 grand, the farmland out on the edges of the city is worth around 10 grand PER SECTION SIZE as farmland. You can buy a second-hand house moved and installed on site by Brittons for around 30 grand.

    Why is it acceptable that a young struggling family has to find 300 grand at least, for an old dump in the slummiest parts of our cities?

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  14. berend (1,716 comments) says:

    The most stupid move of Bollard ever. But he isn’t alone, all Western governments and central banks are now doing their hardest to kill the economy and bring on the mother of all depressions. It seems only killing economies will end Keynesian economics.

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  15. PhilBest (5,125 comments) says:

    # Gooner (326) Vote: Add rating1 Subtract rating 0 Says:
    October 23rd, 2008 at 10:57 am

    “GJ, sorry mate, but that’s absurd.

    Government money is actually my money and that of those around me, and all the taxpayers of NZ.

    I have a hard enough time paying my mortgage costs. Buggered if I’m paying yours too.”

    Gooner, you have hit the nail on the head. Basically, these taxpayer-funded “bailouts” are sharing around everyone, the cost of a folly committed by large numbers of better-off people, and the cost of the bailout lands at least partly on people who not only did not commit the folly, but were penalised through that folly in the first place, in mortgage costs, inability to afford a home at all, and/or being held captives to the rental market.

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  16. gd (2,286 comments) says:

    On the matter of housing my wife and I bought our first house in 1973 It cost $16500 and we had a combined gross income of $10000 or 60% of the cost We borrowed $10000 on 1st mortgage at 6% and $3000 on 2nd at 7.5% and paid the balance of 20% as a deposit

    My daughter is about to marry and buy a first home.

    the difference

    The house will cost around $450000 Combined gross incomes around $120000 so house 3.75 times income Mortgage at 80% $360000 or 3 times gross income compared to 1.3 times.

    WFF or any other STATE handout wont fix this problem. What we have are pollies civil servants and a Governor of the RB who lack the will capacity and capability to deal with the issues.

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  17. GJ (329 comments) says:

    Gooner & Philbest: Yes I agree with both of you in regards government monies is the people’s monies and in a perfect world agree that there should be no subsidies or handouts.
    However lets face it, we are currently a long way from a perfect world and much of our money is being wasted in so many areas. (3 billion for CYF’s being a classic example)
    This suggestion at least helps those that have been helping themselves and may help in keeping some of our much needed talent and workers in NZ. Just look at the incentives the Aust govt is offering in regards to homes.
    We cannot just slam the brakes on everything, we need to turn the direction slowly, firmly and with a focus on achieving a good end result.
    I think this suggestion is thinking outside the box, and would be appreciated by many hard working New Zealanders, many of whom have never asked for or received any help what so ever from Government.

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  18. stephen (4,063 comments) says:

    Now here is a real opportunity to help struggling families. There is a section of the voting public that have never received any help from the Government,

    Whatever your view of it, most people on WFF are most likely to regard it as help.

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  19. rouppe (982 comments) says:

    GJ sorry but that’s stupid.

    I have kept my mortgage floating precisely because I expected the rates to drop eventually. It’s taken longer than I hoped but now that its happening buggered if I’m paying for stupid people who fixed at 9% to break their contract.

    Would you advocate for me to get a refund on the extra interest I’ve paid over 8% because I didn’t fix 18 months ago?

    Didn’t think so

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  20. PhilBest (5,125 comments) says:

    GJ, read what I am saying about the ways to bring about affordable housing. The answer is NOT to live with the inflated values and use taxpayer money to assist mortgagees and home buyers. The answer is to provide new housing at a sensible price and let the market set values at sensible prices at which anyone can afford with a bit of hard work and saving. Hard work and saving, up till now, has merely left such people further and further behind as prices go up faster than they can save money.

    If we persist in propping up the price of houses with taxpayer money, the NEXT crash will take the whole State down, not just the finance sector. That is not an idle threat, that is an economically literate reality.

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  21. dave strings (608 comments) says:

    A quote against a house specification from three Brisbane builders, all good reputation – family firms, averaged $220,000
    A quote for the same specification from three Wellington builders, all good reputation – family firms, averaged $450,000

    WTF?

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  22. Nefarious (533 comments) says:

    “A quote against a house specification from three Brisbane builders, all good reputation – family firms, averaged $220,000
    A quote for the same specification from three Wellington builders, all good reputation – family firms, averaged $450,000

    WTF?”

    That’s probably $230k’s worth of consents, permits and taxes.

    Those snouts don’t eat for free.

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  23. getstaffed (9,186 comments) says:

    I can think of some domestic costs that could be reduced!

    Yes – those Diamond-encrusted, Platinum pension schemes that lousy MPs of all colours have votes for themselves for years.

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  24. OECD rank 22 kiwi (2,753 comments) says:

    gd says at 10:24 am:

    there are still plenty of ways to avoid the top rates.

    Like migration. :D

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  25. OECD rank 22 kiwi (2,753 comments) says:

    What the Governor is actually saying:

    The New Zealand economy is stuffed.

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  26. expat (4,050 comments) says:

    Nefarious (308) Vote: 4 0 Says:
    October 23rd, 2008 at 1:23 pm

    “A quote against a house specification from three Brisbane builders, all good reputation – family firms, averaged $220,000
    A quote for the same specification from three Wellington builders, all good reputation – family firms, averaged $450,000

    WTF?”

    That’s probably $230k’s worth of consents, permits and taxes.

    Those snouts don’t eat for free.

    And monopolistic / duopolistic pricing of building materials by CHH and Fletchers and associated kitchen/bathroom etc crowds.

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  27. PhilBest (5,125 comments) says:

    Owen Mcshane and Hugh Pavletich have written a lot about that phenomenon. The fees and consents process in NZ are a major factor. Then there is the loss of efficiency by the builders themselves because of the regulatory process, and lastly, the loss of efficiency in the NZ Building industry as a whole because they are just not acheiving any sort of efficiencies of scale.

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  28. expat (4,050 comments) says:

    The whole NZ building industry quotes economies of scale as the main reason they cant drop prioces but its quite simple there are only a few major players and they set pricing at a predatory, fixed, duopolostic level. No one has “proved it” buts its quite simple, no competition = consumer being rorted.

    A very good example is CHH timber spec rort – in effect the punter was getting over charged because the timber wasnt of the quality it should have been.

    Extrapolate that over the whole industry and you can see why NZ house prices were so high – the industry was screwing the punter.

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