Cash rate rise to 3%

[Asterix]

My interpretation of todays Reserve Bank Statement:

Ahem, right - um, today we've lifted the cash rate to 3%. None of the data really supports this move at all, but we're a little but worried about business and consumer confidence continuing to fall and things looking generally gloomy, so we're trying to give everyone a bit of a lift by raising the cash rate as if things were actually improving.

Sounds tricky I know - but actually there are other benefits as well. It sends a signal to the rest of the world that we are on the up and don't lump us in with those struggling european economies. And - we've been talking to the banks, and they are about to start price warring on fixed rate terms, so the fact that floating rates will go up a wee bit will be nicely obscured by the fact that our security blanket of 2 and 3 year fixed rates will come back a bit.

Also - we are a bit worried that things might actually get a bit worse, so by lifting the rate now, and maybe once more if we can, when things deteriorate, we can drop them again and be seen to be doing something - because if we leave them low, there is basically nothing we can do if we have further problems. (basically we just sit here and play with this one knob).

So come on people, get with the program, chin up.... things will be ok, see - we've lifted the OCR, things are getting better.

[graemeh]

So Asterix, you're saying that the Reserve Bank Governor is playing with his knob?

[Asterix]

In short - yes. He genuinely has nothing else to do.

[Keithw]

Agree on both counts(posts) Asterix.
I note in this mornings commentary that the Reserve Bank had been "Talking" to the trading banks and the banks wanted the rate to go up- so guess what happened !
The old excuse of the property market getting out of hand and continuing to borrow too much couldnt be used, so they just blatently said what we have always known- it doesnt matter what the economic factors are the banks are in control.

[Davo36]

Just what I wanted when I'm half way through a development and having to borrow money - NOT!

[Keithw]

You're WHAT !!!!!!
You're one of those evil property speculators that caused this whole property explosion !
Its for people like you that we put the rate up, to stop you borrowing more from our overseas investors, so our banks can hold onto the investors money that we desperately want to attract & earn fixed interest from .......errrr
........ahhhh - investment into our businesses - aahh what businesses are left to invest in ?....aahh
........ummmm -overseas property sales ? ....nope
--oh i know- Kiwisaver funds !
and funding the cycleway and other socially useful items

[ChrisD]

Geeze, you guys are acting like it's a personal attack on your business. RBNZ has a number of very good reasons to increase the rate - remember that it is coming up from historic lows and needs to settle back at a natural leve. At some stage Bollard had to take the training wheels off, because we can't be in a perpetual state of quantitative easing.

Furthermore, things are still looking shaky overseas. If the European sovereign debt crisis has a strong effect on our (Australia's) bank's balance sheets RBNZ needs to room to maneuver as far monetary policy - and interest rates are perhaps their most important tool. Keeping interest rates at QE levels is a recipe for disaster - like deflation.

Besides, the fact that the rate went up and the dollar shed USD$0.01 shows that, indeed, both Bollard and the markets recognise that the NZ economy is far from being strong.

[Asterix]

Thanks ChrisD, I'm pretty sure you just paraphrased what I said, but back into Reserve Bank language.

[ChrisD]

Thanks ChrisD, I'm pretty sure you just paraphrased what I said, but back into Reserve Bank language.

Yeah it's all a big conspiracy against property investors

Of course there's no possibility that the RBNZ is being run by educated, prudent people with a balanced overview of the economy.

[Asterix]

Go back and reread the original post. Nowhere did I mention property investors, nor did I take an opinion on whether this OCR move was good or bad. I simply paraphrased it to illustrate the confusion and uncertainty I believe exists in our monetary policy decisions at the moment.

In fact I beleive if you read carefully, you will see that I commented on several of the same reasons as you did for todays decision. Its a catch 22, and he needs to create room to move, and now is a relatively calm time in which to do that.

Its just not as complex as the RB or you would like to make out, but it sounds better to fill the statement with complex economic jargon, so we don't think he's just playing with his knob.

[Jumpin]

Geeze, you guys are acting like it's a personal attack on your business. RBNZ has a number of very good reasons to increase the rate - remember that it is coming up from historic lows and needs to settle back at a natural leve. At some stage Bollard had to take the training wheels off, because we can't be in a perpetual state of quantitative easing.

Furthermore, things are still looking shaky overseas. If the European sovereign debt crisis has a strong effect on our (Australia's) bank's balance sheets RBNZ needs to room to maneuver as far monetary policy - and interest rates are perhaps their most important tool. Keeping interest rates at QE levels is a recipe for disaster - like deflation.

Besides, the fact that the rate went up and the dollar shed USD$0.01 shows that, indeed, both Bollard and the markets recognise that the NZ economy is far from being strong.

I don't think the latest move will come as a surprise it was well telegraphed, and in the big picture won't make any difference. Except perhaps to hardy souls like Davo who are brave enough to continue developing in this climate.

What I don't understand is the 'room to manoeuvre' argument. To take Bollard's 'taking his foot off the gas' comparison, it's like driving the truck on a racetrack and slowing down on the straight, so you have some acceleration in reserve just in case someone overtakes. I say keep the pedal to the floor until we approach the corner, so we go into the curve ahead of the pack.

[Asterix]

Thats how you spin out. You need to brake into the corner and accelerate out of it. If we accept that the OCR is his ONLY tool, and that 2.5% is 'historically low' or as low as we can go, then he needs to create room to move.

I cant help but feel that there is plenty of trepidation in this decision, and that in the event things take a turn for the worse, then he must have some fat in the OCR to use to restore confidence.

[ENP]

GST + ETS = inflation = rate rises

Pretty simple really.

[Asterix]

Not that simple, inflation is still within the target policy band, and the Policy Targets Agreement explicitly allows him to sidestep 'one off' inflationary events such as tax changes etc.

Its pretty simple that its his only weapon, and if he fires all his shots now he cant use it anymore.

[ENP]

I read on interest.co.nz that inflation is forecast for 5% this year.

RBNZ can control inflation but not deflation. Which would you rather have hapen?