Once again, PM should not comment on Reserve Bank decisions

March 10th, 2015 at 3:00 pm by David Farrar

Stuff reports:

Prime Minister John Key has sent a shot across Reserve Bank governor Graeme Wheeler’s bows, effectively warning him not to keep interest rates unjustifiably high as inflation heads lower.

But Key stopped short of calling for an interest rate cut at the bank’s monetary policy review on Thursday.

He noted that while the bank had flexibility it should set monetary policy so that inflation returned to the midpoint of its 1 per cent to 3 per cent target band. …

Key said oil prices were coming down, the exchange rate was still reasonably strong and imported inflation appeared low. In light of that “it’s not an option for the bank to raise interest rates”.

That’s not a decision for the PM. While he is correct that there is no reason for interest rates to go up, he is the PM – not a financial commentator. It is a bad look to have the PM state that something is not an option for the Reserve Bank, because it can look like pressure on them to do as the Government wants.

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Interest rates may hold for another year

October 24th, 2014 at 11:02 am by David Farrar

The Herald reports:

Economists now expect the Reserve Bank to keep interest rates on hold until September next year after inflation in the September quarter proved even more benign than it had forecast.

The consumers price index rose 0.3 per cent in the quarter, when the median market forecast had been 0.5 per cent and the Reserve Bank’s 0.7 per cent.

Westpac and ASB have pushed back their forecasts of when the Reserve Bank will next raise the official cash rate to September 2015.

That will be welcome news to everyone with a mortgage.


As this graph from the Reserve Bank shows, home owners have had the longest period of relatively low interest rates in 25 years.


OCR moves to 3.5%

July 25th, 2014 at 10:00 am by David Farrar


The good news for home owners with a mortgage, or aspiring ones, is that the indications are that there will be no further OCR rises for this year, at least.

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OCR goes to 3.25%

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


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

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Cunliffe on interest rates

March 25th, 2014 at 12:00 pm by David Farrar

David Cunliffe has said:

New Zealand’s interest rates are among the highest in the world and homeowners that are bearing the brunt of them should join Labour’s call for an Economic Upgrade, Labour Leader David Cunliffe says.

“New Zealand mortgage rates are higher than Australia and much of the developed world. That’s because our economy is not paying its way in the world and has major issues that need to be fixed.

No it’s because our economy is growing faster than Australia’s and hence our interest rates have started to go up.



This is using official Reserve Bank data on effective mortgage rates. Note they were up to almost 9% when David Cunliffe was a Minister and are below 6% now. The RBNZ data is not yet updated to take account of the 0.25% OCR rise but it will have only pushed things up by around 0.25%.


What 0.25% means

March 14th, 2014 at 7:00 am by David Farrar

As was inevitable, the official cash rate went up to 2.75% yesterday. Having interest rates go up makes it hard for those with mortgages and increases the cost of borrowing for businesses. But the alternative is letting inflation get out of control, which really harms people on low and fixed incomes. High inflation will not in the long term lift economic growth.

If someone has a $400,000 mortgage 25 year mortgage, then an extra 0.25% on a say interest rate sees the weekly repayments go from $594 to $608 a week. So one increase doesn’t impact a lot, but many of them will.

2.75% is still a historically very low rate. In 2008 the ocr peaked at 8.25%. An ocr of 8.25% might see mortgage rates of 11.75% which has weekly repayments at a staggering $954 a week.


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The NZ housing honeymoon is over

September 27th, 2013 at 12:00 pm by David Farrar

An advertorial from the BNZ:

The housing honeymoon is over

Mortgage rates are rising – but all is not lost for home buyers.

It’s often said that all good things must come to an end, and this certainly seems to be the case with the recent period of record low mortgage rates in New Zealand. With all four major Australian owned banks in NZ having raised their long term mortgage rates recently, prospective home buyers look set to suffer a setback in their spending power. At first glance, a third of a percentage point may not seem like a lot, but to many would be home owners, that tiny incremental difference over a period of a 30 year mortgage can make the difference between being able to afford the house of their dreams or not.

With recent mortgage rate comparisons indicating that the hike in mortgage rates looks to  be increasing over the next 5 years to between 6.3% and 7.1%, it is becoming imperative that new home buyers ask themselves just how much house they really can afford. When one takes into consideration the fact that a 1% increase in mortgage rates is equal to around a 10.75% drop in purchasing power, home buyers, including those who were pre-approved a few weeks ago, will now find that they are in fact eligible for a good deal less than their pre-approved amount.

A common error in evaluation those new to the housing market often make is to confuse a house’s ‘sticker’ price with its affordability. The true cost of home ownership lies in not only the ‘for sale’ price but also in the monthly carrying cost – of which tax, home insurance and of course the mortgage all comes into play.

Faced with the prospect of progressively rising mortgage rates (and therefore higher monthly home payments), existing home owners would be advised to hold off on refinancing their homes, and if they are on a floating home loan scheme to switch over to a fixed rate. Those in the market for a new home would be best off by securing a fixed home rate, as projections are all indicating that the mortgage rate only looks set to increase from here on out – thanks to raised international borrowing costs and the tightening of borrowing guidelines by lenders.

Of course, home owners and buyers alike need not suffer the inevitable rise of mortgage rates by simply reaching deeper into their pockets every month to shell out for higher monthly payments. Homebuyers can instead opt to raise their down payment amount in order to maintain an otherwise constant monthly payment in the face of rising rates. This may be difficult or even impossible for some first time home buyers and recent homeowners, but it is a smart move to make for those with the capability.

A second option is to lower their bid price on a home. Generally, higher mortgages lead to a declining demand from house buyers, so some home sellers may opt to accept the lower bid instead of sitting with a house to sell in a market where the mortgage rate looks set to increase for the next 3-5 years.

So, whilst the mortgage rates offered by all the major banks, including BNZ, look set to head north for the foreseeable future, home buyers are still left with some options to stay ahead of the inflationary curve. Provided they assess their home’s affordability accurately, maximize their equity and attempt to lower the bid price on the house, they should be able to afford the monthly repayments on their dream home. 

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Interest rates below 5%

May 30th, 2013 at 11:00 am by David Farrar

Allanah Eriksen at NZ Herald reports:

Lenders are offering home-owners the lowest short-term bank mortgage rates in New Zealand history as they compete to lure customers before an expected rise next year.

Westpac, BNZ and ANZ have all dropped their one-year interest rates below 5 per cent in the past week and ASB is expected to follow suit before the Reserve Bank puts a cap on the skyrocketing housing market, economists say.

David Chaston, of financial news website interest.co.nz, which compares rates, said banks were “unbelievably competitive” at present.

“The banks themselves have special deals for special-interest groups.

“They sometimes end up with 25 basis points off the published rates. So the trick is to go in there and negotiate hard, and they are very receptive to it at the moment.”

Yesterday, Westpac became the market leader for fixed one-year home-loan rates when it launched its “special” 4.94 per cent deal, down from 5.19 per cent.

It is available to borrowers with at least 20 per cent equity in their property and a minimum loan of $100,000. For two weeks in February, it offered a rate of 4.89 per cent, which was the lowest in history.

ANZ launched a one-year 4.95 per cent offer on Monday, matching BNZ’s move on Friday.

The level of interest rates can make a massive difference to a family’s income, if they have a mortgage.

Say you have a $300,000 mortgage over a 15 year term. Here’s your weekly repayments at different interest rates:

  • 7% – $621
  • 6.5% – $602
  • 6% – $583
  • 5.5% – $565
  • 5% – $546

So interest rates being 2% lower, can mean an extra $75 a week for a family with a $300,000 15 year mortgage.

Having a mortgage myself, I’m appreciating the lower interest rates, but am sadly not seeing an increase in disposable income. I’m being good, and using it to pay off the loan faster.


Headline vs story

May 27th, 2013 at 10:00 am by David Farrar

The headline in Stuff was:

Couple’s $800 debt spirals into $70,000

When I saw the headline I thought it was about one of those bottom dwelling scummy companies that charges something like 10% weekly interest or 500% annual interest. How else does a debt increase 875 fold?

I detest those rip off companies. They are exploitative and worse.

But is this story about one of those?

It started with an $800 loan to replace their car tyres. Ten years on, Teresa and Lomitusi Fesuiai owe $70,000 and face having to sell their home to pay their debts.

The lead paragraph makes it seem so. But then in the second paragraph we read:

The Porirua couple say the tyre loan from Finance Now in 2003 was followed by “$1000 here and $1000 there” to cover family events, gifts and other expenses.

So it wasn’t an $800 loan? It was a series of loans. How much?

Early 2003: The Fesuiais get a loan of $819 from Finance Now to replace car tyres. Over the year they get six other loans for family events, gifts and other expenses.

December 2003: Their seventh advance is for a consolidation loan of $18,639 to settle the existing total and a $1000 cash advance.

So over less than a year, almost $20,000 was borrowed. This is a story more about not borrowing large amounts of money.

So if $20,000 was borrowed in a year, I can see how over a decade that can grow to $70,000. What was the interest rate?

By the end of that year, interest rates of more than 17 per cent, insurance and a swag of fees had combined to leave them with a total debt above $34,000.

An interest rate of 17% doesn’t seem too over the top. It is high, but it is a long long way away from the truly exploitative companies. Maybe the insurance and fees were unreasonable – but we have no details on them.

The couple, who both had steady jobs, managed to pay back $23,000 over the next three years. But in 2008 their loan was transferred to debt collection agency Southern Receivables.

It is very sad for them, and they seem like a nice hard working family who made a bad mistake. But I’m still not sure where the finance company is to blame if their interest rate was only 17%.

In 2011, on advice of a local lawyer, they took Finance Now and Southern Receivables to court, claiming the loan contracts were “unjustly burdensome”, and seeking damages and costs.

But they were almost “laughed out of the courtroom”, Mrs Fesuiai said.

“The company’s lawyers were drawing in their books, the judge was almost asleep. This lawyer just wasn’t up to standard – we didn’t have a hope in hell.”

The court found in favour of the two companies, and ordered the Fesuiais to pay costs of more than $40,000.

Wouldn’t it have been better to spend $40,000 on paying the debt off, than going to court? If the interest rate was only 17% then I am not surprised the court did not find it unjustly burdensome.

They now live in hope that someone will buy their house in Ranui Heights so they can clear the debt. The Rose St property has a $250,000 RV. They still owe $120,000 on the mortgage.

“We have no choice,” Mrs Fesuiai said.

“Our kids have grown up here, we have raised our family here. But we will have to make memories somewhere else now.”

She admitted they had borrowed beyond their means, but bad financial and legal advice had compounded their problems and turned the past decade into hell.

It is a sad case. But the lesson is don’t borrow money for day to day spending unless absolutely necessary, and don’t go to court unless you are very confident of the outcome.

“I tell the kids now, if they don’t have any money for something, don’t get a loan. Just save up for it instead.”

Generally good advice. I wouldn’t say never  get a loan, but if you do make sure you have a repayment schedule that you can comfortably meet.

June 2007: On advice from a local community law group, they stop paying the loans and tell Finance Now in writing it has become “burdensome”.

Not sure that was the best advice.


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The problem for Shearer

March 21st, 2013 at 11:00 am by David Farrar

The undisclosed bank account is posing some challenges for David Shearer, beyond just the transparency issue.

Stuff reports:

Shearer told Fairfax Media yesterday there was no advantage to having the account and there was “nothing special about it”.

Asked what that said about his financial expertise, given low interest rates in the US and the exchange rate losses he may have suffered from a rising New Zealand dollar, he shrugged and said: “The bottom line is it is there, and I have nothing more to say about it really.”

Banks today also questioned why Shearer would keep such a large amount of money in an account that paid such low interest – maybe 1.5 per cent – when he could earn more in New Zealand.

Shearer had also disclosed a mortgage in the register, which would charge a higher interest rate than the banks paid on deposits in New York.

“Why doesn’t he transfer some across and pay off his mortgage?” Banks asked.

How an MP arranges his or her personal finances should generally be of no concern to the public – it is a private matter. But when due to a stuff up, you force it into the public arena, people naturally get curious. You just can’t help it.

Now some people have got over-excited and have been saying that Shearer has a conflict of interest with Labour’s policy to spend billions of dollars pushing down the exchange rate, as that would allow him to convert his US dollars into NZ dollars at a higher profit.

I’m sorry, but that’s ridiculous and is the sort of paranoia best left to some of the extremists on the left who likewise allege that John Key was asking questions in Parliament on Tranzrail to help their share price, rather than because he was (then) Opposition Finance Spokesperson.

Labour want to waste billions of dollars intervening in the exchange rate because they think it will be popular, not to help their leader make money on currency transactions.

So I don’t think the public will have a bar of the conspiracy theories.

But what the public do understand is paying down your mortgage. It’s something common to most families. You pay much more on your mortgage than you get in a bank, so you always transfer surplus savings against your mortgage.

And what the public will be wondering, even though it is none of their business, is why would you have several hundred thousand dollars in an US bank account, and not use it to pay down or off your mortgage. I mean no one sensibly wants to pay more interest to your bank than they have to.

The only three answers I can come up with are:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. There is some other reason to want to keep the money in the offshore account.

Have I missed a significant possibility?

Vernon Small also touches on the political side of the non disclosure:

The blunder shows a slackness and a lack of attention to detail unbecoming a prime minister.

Even having the account – rather than closing it quick-smart when he became leader – is problematic.

What of Labour’s views on economic nationalism? What about investing in local enterprises rather than leaving the money at low interest rates to be invested in the US?

And why not close it and bring it back now? Surely not because he is waiting for the exchange rate to move back in his favour? Mr Shearer, currency speculator?

It isn’t necessary to get overexcited by the ramifications of all this to see the potential for political harm for Labour and Mr Shearer.

By far the worst is that at a stroke he has neutralised attacks he could make, come the 2014 campaign, on John Key’s “brain fades”.

It is not hard to see how they will be turned back on him.

Which is worse: forgetting a swift mention of Kim Dotcom in a briefing by spooks or failing to remember for three years in a row your nest egg tucked away in a New York bank?

Labour had a very obvious campaign around Key having so called brain fades. It is now in tatters.

UPDATE: We have has some useful additional possible explanations. The list now is:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. Deliberately not paying off the mortgage, so he appears “an everyday bloke”
  4. Is writing the NZ mortgage payments off tax as an investment property
  5. Waiting for the exchange rate to drop, before he moves the money back to NZ
  6. There is some other reason to want to keep the money in the offshore account (US itunes purchases?)
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The impact of lower interest rates

May 21st, 2012 at 7:00 am by David Farrar

The Herald reported:

John Key has defended a decision to cancel sales of affordable housing in an Auckland development, saying low interest rates are making it easier for first-time buyers and people on low incomes to afford their own homes.

So how much of an impact do lower interest rates make? Quite a lot as you will see. The caution is that interest rates vary over the life of a mortgage, but they have been low for some time now.

The average house prices at present in NZ are $397,905 nationwide, $443,070 in Wellington and $523,518 in Auckland. Now if we assume a 10% deposit and a 20 year term mortgage, what does 5% mortgage rates mean compared to 8%.

  • NZ – $632 a month lower mortgage payments, saving $151,684 over 20 years
  • Wellington – $704 a month lower mortgage payments, saving $168,901 over 20 years
  • Auckland – $832 a month lower mortgage payments, saving $199,569 over 20 years

Alternatively if one kept the repayments the same, then the savings are even greater:

  • NZ – mortgage paid off six years earlier, saving $222,199
  • Wellington – mortgage paid off six years earlier, saving $247,424
  • Auckland – mortgage paid off six years earlier, saving $292,383

So if you have a mortgage for 90% of the median house value in Auckland, a 1% reduction in interest rates gives you around $60 a week more in the hand.


OCR down 0.5%

March 10th, 2011 at 10:26 am by David Farrar

The Reserve Bank Governor has dropped the official cash rate from 3.0% to 2.5%. Normally OCR movements are 25 basis points only, so a drop of 50 is deemed large.

There are two fiscal costs to the earthquake. One cost is the estimated $15b drop in GDP over the next five years – and the OCR drop is in recognition of this.

The other cost is the actual cost of rebuilding which may be up to $20b. As the construction gets underway, then it will put inflationary pressure on the economy and I suspect we will see interest rates rise rapidly – but not until probably 2012.

Bernard Hickey has a good piece on why the Reserve Bank dropped the OCR, despite inflationary pressures looming.

I tend to think a 0.25% drop would have been adequate, as it sends the signal, but then means a less drastic escalation in future.

However as I have around a $500,000 mortgage which is mainly floating, I at least benefit from the Reserve Bank dropping 0.5% – saves me a couple of thousand dollars.


Bad John

March 7th, 2011 at 2:00 pm by David Farrar

On Breakfast this morning:

Corin: On the cost, 15 billion dollars now Treasury is saying, and 1.5% of GDP, does that make a cut in the official cash rate, some help for monetary policy, pretty much essential this week?

John: Well that’s a matter for the Reserve Bank Governor, and it’s for him to decide and him alone to decide what happens on Thursday …

And that’s where ideally the sentence should stop. But the transcript continues:

but certainly the markets have factored in a likely cut in the official cash rate, and you’ve gotta say lower interest rates probably help the country, but that ultimately is a matter for the Governor

That is a subjective view that lower interest rates help the country. They don’t help long-term if they lead to excessive inflation.

On this case I agree with the PM, but the difference is I am not the PM. By making those comments, we have a possible headline that if Bollard does not lower interest rates that the “PM thinks Governor is not helping New Zealand”.

I’m a bit of a purist. I beleive there are only four people in New Zealand who should not express a view on what the Reserve Bank Governor should do – that is the Minister of Finance, the Prime Minister, the Leader of the Opposition, and the Shadow Finance Minister. They are all his current or future effective bosses, and any comments from them puts pressure on the Governor – even if unintended.

Also politically commenting is not wise. If the Governor happens to do what you say, then there is a suspicion he was pressured to do so. If the Governor does not do what you say, then the media will paint it as a row.

The bottom line is that while the public like having a Prime Minister who will answer questions on almost every issue and subject – potential changes to the official cash rate should be one you don’t answer except to say :”It is a matter for the Governor”

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Interest Rates

January 17th, 2011 at 10:00 am by David Farrar

The Dom Post reports:

Cash-strapped homeowners will see some relief this year, with experts predicting the Reserve Bank will keep official interest rates low until at least September.

However, some experts say even that may be too early.

After two rises of 0.25 percentage points in June and July, the Reserve Bank has held the official cash rate steady at 3 per cent, as economic growth stalled.

Economists still expect a recovery this year, but there is a growing view that Reserve Bank governor Alan Bollard will leave rates on hold for another eight months.

Works for me, as from today I am once again burdened with a mortgage. My disposable income has shrunk by around 75%!


Editorials 11 June 2010

June 11th, 2010 at 3:00 pm by David Farrar

The Herald talks OCR:

Money markets expect this tightening by way of small steps to prompt an official rate of 4 or 4.25 per cent by this time next year, and further increases to about 5 per cent by the end of 2011.

We should not, says Governor Alan Bollard, expect the rate to rise as far as the 8.25 per cent peak of the previous cycle.

Hopefully not, but several things could knock the ship off course. One is rising inflation, the central bank’s core concern.

I think the OCR will increase beyond 5%.

The Press also talks OCR:

Now, however, as recovery begins to look more robust here and among New Zealand’s main trading partners, the central bank must consider again the prospect that inflation will spike outside its target 1 to 3 per cent range. The move yesterday was modest – only a quarter of a percentage point – but it is an indication that the bank is determined to keep inflation expectations under control.

Some manufacturers and exporters have suggested that moving now on interest rates is premature. Manufacturers and exporters, like politicians and indeed all borrowers, never welcome interest rate rises, but the criticism in this case is unwarranted. The Reserve Bank under Alan Bollard has hardly been hawkish on inflation. A sign of this is the fact that, in an effort to balance competing forces during the boom years, the bank allowed inflation to nudge outside its prescribed limits three times in the space of six years. At the moment, inflation in the future is a possibility.

I still think the range should be 0% to 2%, so a midpoint of 1% is targeted.

The Press focuses on the Foreshore & Seabed negotiations:

Last year, the Government announced it wanted to restore the right of Maori to seek customary title in court, and acknowledge the foreshore and seabed not already in private title as public domain. It held nationwide hui, with Treaty Negotiations Minister Chris Finlayson at each one. Though that impressed Maori, they did not like the “public domain” concept. They want ownership in iwi hands, the foreshore and seabed being inalienable.

Again I remind people that the Court of Appeal merely said that an Iwi could try and claim title in court, not that they would get it. They also said one would have to show unbroken usage since 1840. That is a world of difference away from saying Iwi own the entire foreshore & seabed.

What the Maori Party thinks at this point is not clear – it definitely wants the Foreshore and Seabed Act repealed but might be having to weigh up pleasing the ILG against pleasing an increasingly implacable prime minister.

As Mr Key found over the Tuhoe/Urewera matter, it is hard to placate Maori without upsetting many Pakeha or to ameliorate Pakeha fears without upsetting many Maori. He might have to reluctantly accept that the Foreshore and Seabed Act has to stay on the books.

That is an option. Another is to simply repeal the FSA and let Iwi test their claims in court.

And the ODT chides North Korea:

The jury appears to be out on the exact state of mind of the North Korean dictator Kim Jong-il, variously regarded when healthy as either cunning like a fox, borderline mad or just pathologically nasty.

It is rumoured that he suffered a destabilising stroke some 18 months ago and, at 68, is ailing. Consequently, the world’s only hereditary communist dictatorship seems to be gearing up for succession to the “Dear Leader”.

Cuba is looking hereditary also. Ironic that communism was meant to be a fight against inherited privilege.

Had there been serious evidence anywhere else in the world that a submarine of one sovereign nation had arbitrarily sunk a warship of another, in what appears to be an entirely unprovoked incident, the clamour for retaliation or justice would have been deafening.

This is my concern. You reward North Korea for being well mad.

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The left’s banking inquiry

July 22nd, 2009 at 11:00 am by David Farrar

Labour and the Greens have set up their own inquisition inquiry into banks. The Herald reports:

An expert in banking has rubbished a planned inquiry and says banks are being treated as scapegoats.

Massey University Centre for Banking Studies director David Tripe said the inquiry should not be taken seriously.

Little danger of that.

What I find amusing is the opening statement on the inquiry site:

Many New Zealanders are concerned about the high level of interest rates

The floating mortgage rate averaged 6.44% in June 2009. In June 2008 when Labour were in office it was 10.9%. So they were not concerned about 10.9% but are concerned about 6.4%?

That reduction means a $250,000 mortgage homeowner is paying $11,250 a year less interest or has an extra $215 a week in the hand.

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MPs attack banks

June 10th, 2009 at 9:27 am by David Farrar

The Herald reports:

MPs yesterday attacked banks for not passing on interest rate cuts to customers while turning in high profits during a recession.

The rebuke came a day before the Reserve Bank reviews its official cash rate, which stands at 2.5 per cent, and days after some banks increased their long-term fixed interest rates.

Parliament’s multi-party finance and expenditure committee said in a hard-hitting report that it was “concerned that some banks have not passed on the latest … cut to the official cash rate in their interest rates for floating mortgages”.

Not surprised MPs were unanimous on this. Attacking banks is almost as popular as attacking paedophiles!


Credit Reforms Responsible Lending Bill

May 20th, 2009 at 12:43 pm by David Farrar

Labour List MP Charles Chauvel has submitted to the ballot a private members bill – credit-reforms-responsible-lending-bill.

It does four things:

  1. allow pawn brokers to charge administration fees, thereby removing any need for high interest rates
  2. require lenders to seriously consider the actual means of a prospective borrower and their ability to service the debt
  3. allow for the prescription of maximum annual percentage rates of interest payable in respect of consumer credit contracts
  4. restrict the right for a creditor to recover from a debtor any amount beyond the value of the goods sold subject to a security agreement.

Taking each in turn

Pawn Broker Admin Fees

I’m not sure what the original rationale for pawn brokers not being able to charge an admin fee, but seems to me flexibility is a good thing.

Lenders to assess ability of borrowers to service debt

I should start off by saying that I am well aware there are many very scummy companies that exploit people with cashflow problems by taking advantage of their desperation to get them to agree to loans that with compounding interest are crippling.

But I am hesitant about putting the burden of assessment on the lender, rather than the person borrowing the money. The borrower does have some responsibility themselves to judge their own capacity to replay. And you could end up with a lot of uncertainity as to what steps lenders must take to assess repayment. I don’t see this as being practical or necessarily desirable – lenders do have an incentive already to check repayment ability – so they can get repaid.

Maximum rates of interest

The proposal is that the Reserve Bank Governor can set a maximum rate of interest for borrowing. This is well intentioned but may have unintentional side effects. Let’s say you can currently get unsecured borrowing from scummy lenders for between 35% and 75% interest. And let us say the Reserve Bank says that the maximum you can charge os 50%. Now yes that will stop money being lent at 75% interest, but may push the 35% rate up to 50%. A ceiling often becomes a target. And you may also get scummy lenderss claiming greater respectability as their interest rates are “approved by the Reserve Bank”.

Creditor Recovery

I’m not quite sure how this clause will work in practice, so will update when I have worked it out. As I understand itm, this is a more minor part of the law change.

I have doubts over the practicality and desirablity of parts of the bill, but neither do I think the current law is working particularly well – many families are getting exploited.

If the bill gets selected from the ballot, I think it should definitely be supported to select committee so they can consider the issues and proposed solutions. Any support beyond that would depend on what changes get made there.

Generally I support most private members bills going to at least select committee for hearings. My exceptions are those that are:

  1. Obnoxious (EFA type laws) and so bad not possible to make into good law.
  2. Directly contrary to the Government’s policy (designed just to score political points)
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Interest Rate Margins

January 29th, 2009 at 9:00 pm by David Farrar


This graph used the Reserve Bank data and shows the difference between what banks are charging for floating mortgages and what they pay for six month term deposits.

The big spike at the end is the credit crisis at work, but also maybe showing that the banks are not doing too badly.

But what I found interesting is there has also been a gradual increase since 2000 in the margin.


OCR now 3.5%

January 29th, 2009 at 9:32 am by David Farrar


I remember the days when a 50 basis point drop was a big thing. Now we have 150 point drops that are in line with expectations.

This should start to push mortgages back into the affordable category for more people.  Of course depends where retail rates go.

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OCR drops 1.5%

December 4th, 2008 at 9:19 am by David Farrar

Look at that baby drop. The Governor is not giving much away about further drops, but I think we can expect at least 50 more basis points next year.

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December 2nd, 2008 at 8:47 am by David Farrar

The Herald quotes John Key:

“We’ll be looking, like others, to see what the Reserve Bank governor does on Thursday but we would be anticipating significant rate cuts,” he said.

I’ve noticed that as Opposition Leader, John would often predict or even suggest what the Reserve Bank will do with the official cash rate. It was an annoying habit in Opposition, but a bad habit to keep going in Government.

In some ways the PM is just stating the obvious. Even the stupidest first year economics student knows that the Reserve Bank will cut the cash rate on Thursday. The only debate is by how much.

So, to be fair, when the PM says he is anticipating significant rate cuts – he is speaking literally – he is anticipating cuts, like everyone else.

But he is not like everyone else. He is the Prime Minister. And it is unwise to carry on a commentary on what you think the Reserve Bank Governor will do, when you hold that job. Because sooner or later it will be interpreted as pressure. It will be seen as trying to indirectly instruct the Reserve Bank – even if that is not the intention. It will one day generate negative headlines when the PM predicts one thing, and the Reserve Bank goes the other way.

Here’s my preferred responses for a PM on what the Reserve Bank will do:

Well the Reserve Bank makes it own decisions on the cash rate, and I don’t think it is helpful for me to speculate – I’ll leave that to the bank economists.

As I said above, it isn’t a big issue this time, because it clearly wasn’t a comment to pressure the Reserve Bank – it was stating the obvious. But in future the circumstances may be different, and best to bury a bad habit early – in my opinion.

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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 inflation will return to the target band of 1 to 3 percent around the middle of 2009. 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.

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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The economy

October 8th, 2008 at 7:44 am by David Farrar

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

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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%.

Reserve Bank 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 inflation will remain too high for years to come.

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