OCR goes to 3.25%

June 12th, 2014 at 10:00 am by David Farrar

OCR

As widely expected, the has lifted the official cash rate from 3.00% to 3.25%. To put things in context, I’ve graphed the level of the from 1999 to today. It is still significantly below the early 2000s, let alone the mid 2000s.

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35 Responses to “OCR goes to 3.25%”

  1. igm (1,413 comments) says:

    Still need to go higher to assist those living off bank interest. Of course that will not satisfy those leeching off benefits.

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  2. Harriet (5,200 comments) says:

    “Still need to go higher to assist those living off bank interest.’

    Much much higher as inflation is probably 2%[i haven’t looked].

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  3. Ed Snack (1,940 comments) says:

    Yep, the idea of subsidizing borrowers has had a nasty affect on those foolish enough to consider trying to save.

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  4. itstricky (2,021 comments) says:

    Still need to go higher to assist those living off bank interest. Of course that will not satisfy those leeching off benefits.

    Who would have thought you could turn a purely financial post into a igmorant rant? This guy has the gift of the (derogatory) gab.

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  5. Don the Kiwi (1,814 comments) says:

    disagree igm.

    If you have money just sitting in the bank, you are leaching off those who have to borrow to get ahead, and the higher the interest, the harder it is. Young families with mortgages, people trying to get a business going, and the elderly who are retired, but still need to have a mortgage.

    Get your money out working – invest in a business or the share market. Its your attitude that has led to the financial institutions controlling the world, when previously, it was the people – the entrepreneurs – not the Wall Street thieves – and others of their ilk.

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  6. flipper (4,330 comments) says:

    The annual CPI to end of March quarter was 1.5%.
    In the last quarter the major contributor was an increase in taxes on cigs/tobacco.
    The cash rate adjustment will make bugger all difference in year to June 30… likewise in year to Sept 30.

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  7. igm (1,413 comments) says:

    Don: I have business interests, properties, and shares, so don’t get off your high horse. Also, I have paid close to 25% interest in times gone by, having to work harder and longer to service it. Trouble is, too many with attitudes of entitlement, wanting everything for nothing for no effort or self sacrifice. Get off your arses, go out and work, earn, and become successful, don’t sit back becoming left-wing leeches.

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  8. Jack5 (5,278 comments) says:

    I sympathise with Don the Kiwi’s views (10.12 post).

    Then there’s the Kiwi dollar, which is up with today’s interest rate rise. Since dairy prices began to fall we’ve been told the floating currency is a mechanism that will automatically compensate the export sector. Yeah?

    We give Reserve Bank governors autonomy, and they blunder on. Brash, 1988-2002; Bollard 2002-2012; Wheeler since September 2002.

    We’ve all have had a good view of Brash as a politician; Bollard was a nice quiet operator, an amateur water-colours painter as well; and Wheeler, a quiet, international bureaucrat. Nice blokes all, but unimaginative, conventional, and too convinced about the correctness of their economic strategy. Compared with them, countries such as Singapore, Switzerland, even China, with different strategies, were well, just unenlightened.

    So our export sector growth has been modest, and very narrow (milk powder to China dominates), and with dairy prices now past their peak we still haven’t broken 40 years of current account deficits.

    Maybe we should contract out Reserve Bank management to some country that’s doing better in its business with the rest of the world.

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  9. Adolf Fiinkensein (2,703 comments) says:

    No doubt this will be reported as a ‘hike.’

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  10. burt (7,425 comments) says:

    In a single sentence the lefties will defend it being higher under their dear leader AND slam it for being too high now.

    The fact they follow a fatally flawed ideology that has never worked is a good indicator that they don’t have the intellectual capacity to see the hypocrisy in the positions they take. It’s different when Labour do it !

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  11. gump (1,683 comments) says:

    @Adolf Fiinkensein

    “No doubt this will be reported as a ‘hike.’”

    ————————-

    Here is the lead story headline on the NZ Herald website:

    http://imgur.com/sZvxIrG.png

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  12. Jack5 (5,278 comments) says:

    Burt, the idea of an independent Reserve Bank seems good, in my view. The only but terrifying threat is what a Green government might do to and with it.

    The problem is its mandate, which is too narrowly based on inflation, and tools, which are far too few and are inadequate for controlling inflation without fucking up the export export sector.

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  13. burt (7,425 comments) says:

    Jack5

    Indeed. If anyone thinks the OCR is high now (or has been high in the last 2 decades ) wait till the cash printing presses are in full production.

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  14. Pharmachick (248 comments) says:

    Burt & Jack5,

    in a managed economy like ours there are limited safety valves. I’m also given to believe that OCR is a pretty blunt tool, actually. And as for the printing presses, lived for over a decade in the US, through the GFC and Housing bubble etc and have just alighted in Canada – the “print more money” idea is economic terrorism. The US is in *severe* financial straits an there are going to be some major adjustments in the world economy not too far in the future. Canada has avoided this by being fiscally conservative (oh yeah, and not starting wars), but they’re currently eviscerating Education and Healthcare to keep primary industry (here its natural resources) going… be careful what you wish for.
    EDITS: the Canada stuff

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  15. burt (7,425 comments) says:

    Pharmachick

    Yep, when my oldest boy was about 6 he asked me why the government don’t just give everyone a million dollars. I tried to explain to him that if everyone had $1m that a liter of milk would probably cost $10,000 – he was too yound and inexperienced to understand that. Now, in his late teens he can understand it. It’s a shame the “mega brains” in the Green party can’t.

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  16. stigie (1,448 comments) says:

    This will be all doom and gloom from the far left….wait for the bitching from Liarbore !~

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  17. burt (7,425 comments) says:

    stigie

    Absolutely… National destroying the economy because interest rates are heading back toward where they were under the fiscally prudent Labour government – lol.

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  18. stigie (1,448 comments) says:

    @ burt

    Fiscally prudent Labour government….that cracks me up everytime i hear that !~

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  19. Pharmachick (248 comments) says:

    Burt, thats a great one! Completely blows the “how many Moros would I have to forego if I bought that… [insert childhood want]” question that my mother instilled into me out of the water (Moros were an unbelievable treat in our house). And don’t be too harsh on the Greens, your milk example has completely bypassed the US Federal Reserve as well. Lets hope we don’t end up back in stagflation…

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  20. Meatloaf (275 comments) says:

    When interest rates are low, the real estate agents try to persuade people to go on a borrowing binge. By raising interest rates it puts a stop to this borrowing binge. Unfortunately their is no other solution. They tried the 20% deposit minimium, and got attacked by first home buyers. I expect that there is going to be a lot of defaulters. A friend of mine went to Huntly from Auckland, to buy a house, as it was only a fifth of what he would pay in Auckland. His rates, interest payments and principal payments are exactly what he paid to rent a place in Auckland. So that’s when interest rates are low, what about when they go up?

    This to me says that housing is definitely overvalued in Auckland. By interest rates going up, this will make other investments attractive. But it will also mean that interest rates on those running a business will be higher, and it will also make our exchange rate higher, which will hurt exporters.

    But what other solution is their to cool down our overheated Auckland housing market. If a solution is not thought up, it will just continue. My idea is essential full market information. The real estate agent would disclose proper and full information. They’d say this is how much money people pay in rent for this property. This is the average rate of interest over the last 20 years, and from their people would work out for themselves what the real value is.

    Suppose for example, the average rate of interest is 9%. If you borrow $500,000, this means you will pay 9% x $500,000 = $45,000 a year in just interest on average, which is approximately $900 a week. If that same house could be rented at $500 a week, you know the price is too high. If people had confidence in investing elsewhere and getting a real return, and being able to assess the level of risk themselves, then this would dampen the price on housing. Until this happens, nothing is going to change. But having proper information disclosed is part of the solution. Unfortunately you have people new to the country who want to buy up right away, and the real estate agent is only interested in hiking up the price.

    So I believe in the market, but by definition in a free market, their is complete information about everything. The real estate agent just wants to charge what he can, and get a higher percentage. And investment managers don’t want people to understand everything about money, as investment managers would be out of a job and unable to charge high fees. And City councils get a percentage of the value of a house. That’s why Mayor Len Brown, didn’t like the Reserve Bank wanting to have the 20% deposit rule.

    So what solutions can you guys come up with, unless we come up with something, this will continue and continue.

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  21. ross411 (906 comments) says:

    Don the Kiwi (1,488 comments) says:
    June 12th, 2014 at 10:12 am
    disagree igm.

    If you have money just sitting in the bank, you are leaching off those who have to borrow to get ahead, and the higher the interest, the harder it is. Young families with mortgages, people trying to get a business going, and the elderly who are retired, but still need to have a mortgage.

    Get your money out working – invest in a business or the share market. Its your attitude that has led to the financial institutions controlling the world, when previously, it was the people – the entrepreneurs – not the Wall Street thieves – and others of their ilk.

    A mortgage is just another form of saving. Too bad others have to be the ones that stop saving, so your favoured savers can go on saving better. What a load.

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  22. ross411 (906 comments) says:

    Meatloaf (70 comments) says:
    June 12th, 2014 at 11:52 am

    So what solutions can you guys come up with, unless we come up with something, this will continue and continue.

    Communism? Everyone is equal, except those that are more equal. You will know those people because they have been training by their positions on left-wing political organisations and unions. They will be the ones driving the hummers and cracking the whip while you toil in the field.

    If you like the sound of this, vote Green or Labour.

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  23. Barnsley Bill (848 comments) says:

    Nice, the reserve bank just took a massive shit on all of us who don”t own property in Auckland and Christchurch.
    Thanks
    Despite being accused of being a bit of a cheer leader for parties of the right over the years I really cannot understand why after nearly six years of a John Key government it is still a major head fuck to get anything through a council planning department without paying the fuck you fees and jumping through a thousand flaming hoops.
    Fixing the council handbrake will fix the ovrheated property areas not making my mortgage in Kerikeri more expensive.
    When added to a catastrophic drop in property values in the Far North is it any wonder that we are cursed with crime, child neglect and thousands of feral no hopers preying on the last handful of net tax payers up here.

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  24. Meatloaf (275 comments) says:

    Thanks Ross, and a positive green tick to you. If people rush into housing, without having saved, and taken advantage of other good investments, low risk, reasonable return gains, they’re going to have problems when interest rates rise. Those who save don’t have a house, so they deserve to get good returns. To me again the solution is people being able to make good rational well thought out decisions about where to invest there money. I don’t think investment managers would be too happy, but that’s just too bad.

    I was referring to a previous post, no I don’t advocate communism, and I have never voted the greens or labour.

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  25. Ed Snack (1,940 comments) says:

    Don, you seem rather ignorant on the role that borrowings play in business. Very few businesses rely purely on shareholders’ funds entirely, almost all have a mix of shares and debt. Shares are “expensive” in that they bear the risk but reap the rewards if the business thrives. Borrowings are cheaper but are typically secured over various assets, so have some backstop on losses and so get a lower return.

    Without savings, there’s no lending, so by putting money into the bank you enable lending but take a lower risk. That’s entirely appropriate for someone who is, say, retired and needing some income but doesn’t want to go out working again.

    Young families with mortgages, buy what you can afford, many of them are just in the market to take advantage of the capital gains, and because NZ has a poorly developed rental market thanks to years of neglect.

    Meatloaf, the sums that people do though are: I have enough deposit so that my outgoings on the rental are covered by the rent and I make no profit for several years and my capital is generating me no return; but, in 20 years I’ll sell it for multiples of what I have spent and will make a significant profit over time. And they’re largely correct, if you are a long term property investor in especially Auckland you will make a percentage gain absolutely unmatched by any other investment unless you get lucky and bought Xero (say) at $3.00. You rarely pay tax, almost never lose out by values dropping, and you will be protected against inflation. Doesn’t always work, there are times and places when property prices drop, but not in NZ for a long time.

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  26. Viking2 (11,674 comments) says:

    Inflation is usually described as too much money chasing to few goods.
    So who has all this money to spend?
    Well its those at the middle and higher end of WWF.
    If we didn’t have such a generous WWF package then we wouldn’t need higher interest rates.

    Who can change that and won’t?

    The Governor can’t so he reacts in a manner that penalizes business, exporters (dollar up .75 cents today), other home owners
    So the blame for this must go directly to English and the Govt and you should vote to change their attitude accordingly.

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  27. wreck1080 (3,999 comments) says:

    @Barnsley Bill:

    Everytime the interest rate changes there are winners and losers.

    What would you have done?

    No matter whatever you do, you’d have people like you saying you are “shitting on them”.

    It’s a balancing act, I’m a saver so I win out of this i guess .But, i’ve been the loser for the last 7 years and even more so on my GBP bank account which is currently earning 0%.

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  28. Meatloaf (275 comments) says:

    Ed Snack, unfortunately business people cannot get the full loan from a bank. Banks like to know, that people are putting some of their own money in the business, because if it collapses, the sales value of the assets won’t be what was originally paid. For instance if I buy $1,000,000 worth of furniture and fixtures, materials, and other assets, but have difficulty paying the bills, and have to sell, I might get $500,000 of it back. This is just one of the reasons why banks are very nervous to lend to business people who are not putting in at least half of their money. Yet they have confidence lending on property, because they expect to get most of their money back. So well spotted in your comments about banks and shareholders.

    Viking 2, how does this sound, we scrap WFF, and impose a zero zone on tax. We say if your single, the first $200 a week is tax free, and if your married, the first $400 a week is tax free, and then after that you pay a flat rate of 20%. At the moment the accommodation supplement is part of the WFF package. The more you pay in rent, the more the government chips in, this is why people can afford to pay so much in rent payments. This WFF was started by United Future, and I just think a zero zone on tax would have been better.

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  29. hj (7,165 comments) says:

    How about overlaying house prices on that graph?
    http://www.rbnz.govt.nz/statistics/key_graphs/house_prices_values/
    Shows who is going to do the heavy lifting for the un-earned capital gains.

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  30. hj (7,165 comments) says:

    Kurt Richenbauer said “asset inflation isn’t wealth creation, it simply creates a charge elsewhere in the economy” or (as someone else put it) “a hole that has to be filled ” by some poor sod.

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  31. wreck1080 (3,999 comments) says:

    It was also mentioned that the kiwi dollar closely follows the terms of trade.

    However, this historical correlation seems to be going through a divorce.

    Terms of trade are falling but dollar is shooting up still.

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  32. ross411 (906 comments) says:

    Meatloaf (72 comments) says:
    June 12th, 2014 at 12:16 pm
    Thanks Ross, and a positive green tick to you. If people rush into housing, without having saved, and taken advantage of other good investments, low risk, reasonable return gains, they’re going to have problems when interest rates rise. Those who save don’t have a house, so they deserve to get good returns. To me again the solution is people being able to make good rational well thought out decisions about where to invest there money. I don’t think investment managers would be too happy, but that’s just too bad.

    I was referring to a previous post, no I don’t advocate communism, and I have never voted the greens or labour.

    I was originally going to write a response which bemoaned the pointlessness of proposing solutions on a right-wing echo chamber, but what more would that achieve.. People like to live in their bubble, whatever it is.

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  33. Meatloaf (275 comments) says:

    Hi Ross, I’m glad we have that cleared up.

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  34. ross411 (906 comments) says:

    Barnsley Bill (946 comments) says:
    Nice, the reserve bank just took a massive shit on all of us who don”t own property in Auckland and Christchurch.
    Thanks
    Despite being accused of being a bit of a cheer leader for parties of the right over the years I really cannot understand why after nearly six years of a John Key government it is still a major head fuck to get anything through a council planning department without paying the fuck you fees and jumping through a thousand flaming hoops.

    Couldn’t the councils be at fault to some degree? What about past governments who had their hand in? It sounds lke you have a convenient whipping boy in John Key, there. I hope that works out for you.

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  35. Ed Snack (1,940 comments) says:

    Meatloaf, “Ed Snack, unfortunately business people cannot get the full loan from a bank. Banks like to know, that people are putting some of their own money in the business, because if it collapses, the sales value of the assets won’t be what was originally paid. For instance if I buy $1,000,000 worth of furniture and fixtures, materials, and other assets, but have difficulty paying the bills, and have to sell, I might get $500,000 of it back. This is just one of the reasons why banks are very nervous to lend to business people who are not putting in at least half of their money. Yet they have confidence lending on property, because they expect to get most of their money back.”

    Of course banks don’t lend to 100% (unless forced to or unwittingly), having some shareholder/owner skin in the game makes it work. Risk/reward and all that. Banks like to have security over valuable assets, but they’ll take it over everything they can to minimize losses. As you know, when you start out you may only want to commit $X as shareholder funds, but the banks will want additional security over any other assets it can, like your house.

    As as for them willingly lending into the housing market, well, historically they’re right, they very rarely lose on mortgages, in NZ anyway and almost anywhere where normal banking prudence holds sway. In the US for mainly political reasons a lot of mortgages were advanced on minimal security to meet racial and other quotas, and that was (IMHO) the key initial driver of the GFC when a whole chunk of “secured” loans turned out to be not secured at all. The first brick to drop was the mug corporation that insured all those loans at derisory rates because they didn’t do due diligence on the security (and on the reliability of the cashflows, which is related).

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