Monetary policy

Audrey Young on Little’s economic madness

Audrey Young has lambasted Andrew Little and his current madness about stiff-arming banks and controlling interest rates.

The latest battle in Parliament is not over which party is the farmer’s best friend in the middle of the dairy downturn because Labour was always going to struggle on that count when it opposes the tariff-cutting TPP.

So Labour redefined the battle yesterday into who is the biggest enemy of New Zealand’s foreign-owned banks.

These are banks which could be preparing to force farmers off their land, land which could be sold to foreigners, and banks which have been slow to pass on the latest cut in the official cash rate to lenders and could hold out altogether despite competitive pressures.

John Key was always destined to lose a contest to demonise banks for something that hasn’t yet happened.

Having acquired a fabulous fortune in a successful career at Merrill Lynch, it is hardly surprising the Prime Minister doesn’t see the banking sector with horns and a fork.

But a tweet by Labour MP Iain Lees-Galloway summed up Labour’s view of Key as “a complete and utter banker”.

Read more »

More good news

The good economic news keeps on coming in, destroying the opposition and their trash talking of the New Zealand economy.

The latest piece of good news is from the IMF who have given our economy a big tick.

Macroeconomic policies are moving in the right direction. With excess capacity largely exhausted the RBNZ has begun tightening monetary policy. The government?s plan to return the budget to surplus is on track. With public debt low and interest rates above the zero bound, the authorities have monetary and fiscal policy space to respond to shocks, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. The well targeted macro-prudential policy framework should allow the RBNZ to take additional measures if needed to guard against the financial sector risks that would arise from an unsustainable acceleration in house price inflation.

[…]

Growth is forecast to increase to about 3? percent this year and moderate to a trend rate of 2? percent over the medium term. Strong construction activity is expected to remain an important driver for near-term growth (text figure), although the speed of the Canterbury post-earthquake rebuild and its interaction with the wider economy are less certain. The terms of trade are projected to ease somewhat due to an assumed moderation in global dairy prices, but remain high relative to historical levels and continue to boost growth in national income. The current monetary policy stance remains well below neutral, and with leading indicators pointing to an economy that is set to grow above trend in the near-term, pressure on core inflation should follow, particularly from the construction sector.

[…] ? Read more »

BNZ warns Labour over their “big tool”

It looks like the BNZ is not at all keen on having Labour’s new “big tool” deployed.

Their Chief Economist Tony Alexander has issued a warning to Labour that their much vaunted policy won’t work as intended.

Labour’s plan to use KiwiSaver as a monetary policy tool would force investors into buying more shares when prices are high and fewer when they are low, Bank of New Zealand chief economist Tony Alexander has warned.

The proposal from Labour, unveiled earlier this week, was for KiwiSaver to be made compulsory, and the minimum contribution rate lifted or dropped as a means of influencing the pace of household spending growth.

It was billed as an alternative tool to using interest rates to dampen or stimulate economic activity in the economy, and therefore inflation.

But in his weekly newsletter, Alexander has warned about its potential pitfalls, including lifting volatility on the sharemarket.

Alexander said: “The policy would boost Kiwisaver contributions when the economy was booming and presumably asset prices like shares rising firmly and at high levels. The tightening of monetary policy would lead to more asset buying out of the contributions and this would amplify the equity price cycle while forcing people to buy more when equity prices are high.”? Read more »

So, Labour launches a policy to solve Kiwis money fears…only problem is Kiwis don’t have that problem

Labour launched their much vaunted new “Big Tool” to solve some problems they say are worrying Kiwis. Like rising interests, that are still miles off where interest rates were the last time they were in government…and protecting borrowers from money issues.

The only problem is for Labour is that the problem doesn’t actually exist in voters minds.

Kiwi’s money worries are at the lowest level in two years and are expected to continue improving this year, according to a report by a credit agency.

Dun & Bradstreet’s Consumer Financial Stress Index hit -5.6 points in March down from 7.5 points the same time last year.

Anything below zero shows lower financial stress.

stress Read more »

Does Labour actually understand what it is they are trying to fix with their new ‘big tool’

We already know that David Parker appears to have plagiarised his new ‘big tool’ plan from Michael Cullen.

We also know that Cullens plans were slated at the time by Matt Nolan.

But since Labour is intent on running this Cullen plan Matt Nolan also questions whether or not they understand the problems that theya re trying to solve.

Labour has put a bunch of thought?into its discussion on monetary policy?- and there is certainly nothing wrong with discussing the issues and putting out a policy document, in fact there is a lot right with that. ?Furthermore, over their entire document they recognise this is a multi-faceted issue we need to be careful with, I appreciate that a lot.

However, there are still a few glaring issues with the way they discuss monetary policy:

  1. They keep mixing ?monetary? policy with longer-term ?fiscal? policy. ?It is not the RBNZ?s role to determine longer-term fiscal policy ? this is undemocratic.
  2. On that note ? the ?external balance? is not an RBNZ target, and nothing they are suggesting actually helps that. ?This is a general issue with medium-long term savings-investment imbalances, and we need to neatly define what the welfare relevant ?problem? is before we go swinging around policy and reducing the ability to ?judge? the Bank by giving it piles of targets. ? ? Read more »

What problem is the “Big Tool” trying to solve here?

So, the beguiling message is “stop paying interest to those overseas owned banks, put your money in your savings account instead”.

If it was that simple, why hasn’t anyone done that before?

The real question is, what exact problem is Labour’s David Parker trying to solve here? ?What is actually broken right now that needs fixing?

Bill English explains

Let’s start with a quick stock-take. The economy is growing, employment is increasing, wages are rising, exports are growing, business and consumer confidence are elevated, house-building is increasing and interest rates have just moved off 50-year lows. Looking ahead, the New Zealand economy needs more skilled people, more exports and less household debt, and the trends for each of these is positive. New Zealanders have learned that we can get on top of tough problems and grow our jobs and incomes if we stick to sensible and considered change, year after year.

As we’ve reported ad nauseam, the New Zealand economy is coming right in spite of the strains that the Global Financial Crisis and the Christchurch earthquakes have placed on it. ?There are always problems and challenges to overcome, but on the whole, the economy is in a state of requiring small conservative adjustments over time. ?Not some radical untried overhaul.

Bill English continues ? Read more »

Barry Soper is brutal on Labour’s new ‘big tool’

Barry Soper, a long time socialist and a big fan of Helen Clark, has been brutal this morning on Labour’s new ‘big tool’ policy.

When it comes to monetary policy in this country, it’s always been a ‘robbing Peter to pay Paul’ exercise – Peter being the long suffering home owner with a mortgage and Paul being the foreign-owned banks.

Labour’s come up with a way of changing the mix, a sort-of ‘robbing Peter to pay Peter – providing Peter has a mortgage’. If he doesn’t, then he is simply mugged in the short term and may be able to enjoy his retirement if he recovers.

This is the massive problem for Labour…people don’t like being told what to do with their own money and they hate even more being told they can’t have something until much, much, much later. They certainly won’t buy the line that it is for the good of the nation…especially when there are bludgers within easy reach that they think should do their bit first.

At the moment if we’re all out having too much of a good time spending up large on things that we don’t really need and socially over-indulging, then we’re doing our bit to fuel inflation.

It’s our money, so what. Typical of Labour to want to control everything with their Stalinist, we know best, policies.

It’s that sort of behaviour that makes the Reserve Bank Guv tetchy, and he’s likely to turn on the money market vacuum cleaner, raising the Official Cash Rate. That drives up our mortgages, which means we pay more to the foreign owned banks and have less to spend on enjoying ourselves. ? Read more »

Why the ‘Big Tool’ won’t work

Rob Hosking explains the logic fail in David Parker’s ‘big tool’.

It’s an interesting idea. One of its origins seems to be the Australian example: its compulsory savings scheme was introduced largely because?the then Labor government of Bob Hawke wanted to provide pay increases for employees but, at a time of high inflation, did not want to do so in any way that would further boost inflationary?pressure.

In the form of the VSR, it would enable the Reserve Bank to not only manage inflation without hiking interest rates, it would also ? and Mr Parker’s speech spent much time on?this ? therefore lead to a lower exchange rate.

This is where the very large evidential leap of the policy occurs.

The ?entire policy rests on the assumption a lower interest rate?will also lead to a lower exchange rate. This is by no means a given: interest rates have been at their lowest rate for much of the period since 2008 and yet New Zealand’s exchange rate has been?at historic highs for much of that period.

There is, in short, nothing to suggest the policy will have the effect which is being promised.The second issue is more political. ? Read more »

The new big tool is likely to be little better than politicians snake oil

The ANZ Bank is having none of David Parker’s posturing and mistruths.

In their latest?Market Focus of 28 April 2014?they basically call out Parker as a snake oil salesman.

The monetary policy framework has served the NZ economy well.?Tweaks have been made from time to time to ensure that the NZ framework has evolved in line with global best practice, with the use of macro-prudential policy adding more ammunition to the RBNZ?s policy arsenal. However, the mandate has remained?price stability, as this?is the best contribution monetary policy can make to delivering better outcomes.? Read more »

Cunliffe’s economic illiteracy exposed

in-your-money

Jamie Whyte exposes Labour’s and David Cunliffe’s economic illiteracy.

David Cunliffe today gave a speech to the New Zealand Initiative, an economics think tank. The talk outlines the Labour Party?s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour?s economic goal and its proposed monetary policy.

Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to ?support New Zealand business in the journey from volume to value?. He then claimed that ?the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance?.

A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value ? the exact opposite of Mr Cunliffe?s goal.

Such confusion would be funny, if only there weren?t a chance, however small, that these people will get a chance to act on their ideas.? Read more »