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Tuesday, July 15, 2008

Of interest

Well no surprises here then:

Soaring food and petrol prices pushed annual inflation up to 4 per cent in the June year after the Consumer Price Index (CPI) leapt a higher than expected

The Reserve Bank Governor is no Brashtonian Man of Steel. Bollard has a heart. This makes him soft. This makes him stretch his 1-3% target out on a regular basis - now it's 4%. Brash would have kicked low unemployment in the spine years ago had he still been Governor.

They know interest rates are becoming a less effective tool to influence inflation. Credit creation in advance of national asset and production backing is the real problem. This currency inflation will have the corresponding exchange devaluation at some point - perhaps it has already been underway for six months. Ignor the US dollar - they're toast - look at our other trading partners. Australia and the Eurozone. The monetary paradigm has arguably shifted in the last ten years.

So when our nation's consumption and production patterns are static, and we are still importing much more than exporting and very large debts have been added (mainly in the form of property lending), to our system it tends to make our economy weak. As in credit down-grade weak.

They expect interest rates to come down next week? That would be very surprising. What if they did lower the rate and it put more money in the hands of the mortgaged class. Would they do something prudent like retire debt? or would they load up more debt at the better rate and continue the property bubble? or would they take the opportunity to escape winter for a long weekend in Tahiti? or buy another year's worth of botox injections? I think they would spend it. On the currency side our dollar is now less actractive to "invest" in because the interest rate is lower and so we start to lose value and everything we buy from overseas costs more and inflation shoots up. Now why would Bollard want that?

If Bollard lowers the rate in September Labour could credibly argue that the economy has "turned the corner" - they take the credit - and the key demographic gets a few bob extra in the hand before the election. It would not surprise me if it plays out like that.



At 15/7/08 2:27 pm, Blogger llew said...

"Would they do something prudent like retire debt?"

Well some of them would!

At 15/7/08 4:41 pm, Anonymous Anonymous said...

Oh what fun!

While prudence suggests leaving the OCR where it is, innovation suggests kick starting the economy in a big way. For instance, drop the OCR down to 2%, accept the fact that we will be stuck without any new Mercedes, Beemers, Scanpans, Lattes, Saville Row Suits, etc for a while and hunker down in the living room for a while.

That might give us some retained manufacturing, as well as a hefty increase in brain gain (which we must need desperately judging by the recent hiring in Telecom).

Yawn, was I just dreaming of innovation returning to New Zealand? Must be getting old!

At 15/7/08 11:03 pm, Blogger Steve Withers said...

The OCR at 2% would probably see 3 bedroom bungalows in Glenfield on the North Shore selling at $1 million each.....and a credit bubble to beat all bubbles.....

How do I know this? That's what the US of A did when they set their rates to ridiculously low level to attempt to avoid the fallout of the tech crash.

At 16/7/08 9:39 am, Anonymous Anonymous said...

If they drop interest rates what do you think happens to exchanges rates and the cost of imports such as petrol?

Helen's in a fix for which there is no solution.


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