RT @JoshBBornstein: 65 year study confirms my research: Tax cuts don't lead to economic growth. Ping @Nick_Xenophon , @BCAcomau https://t.…
19/08/2017 9:13 PM
RT @attn: .@Schwarzenegger has a blunt message for Nazis. https://t.co/HAbnejahtl
18/08/2017 9:38 PM
RT @PositiveMoneyUK: Make Monetary Policy Fair: It's time to explore alternatives to 'conventional' QE. https://t.co/m6CFVojm7w #QEforPeopl…
18/08/2017 9:35 PM
@deirdrekent To be expected when income is taxed and capital gain not...
16/08/2017 9:22 PM
@bernardchickey @YourHomeLoanNZ Add ring fencing loses / deal to negative gearing and we might see some balance develop in the economy.
16/08/2017 7:36 PM
@bernardchickey Or take the job and do the right thing anyway - the RBNZ is "independent" after all...
16/08/2017 7:34 PM
@bernardchickey Not take the job because you would know you would be on a hiding to nothing. The link between earn… https://t.co/nxPRuAaT6t
16/08/2017 7:31 PM
RT @theyearofelan: Sure, the cancer was aggressive. But the chemotherapy was also very aggressive. There was aggression on both sides
16/08/2017 7:27 PM
@bernardchickey DTI+LVR+OCR all needed for financial stability & inflation.RBNZ can then push back on dumb policy f… https://t.co/CqXISZUHGq
16/08/2017 7:27 PM
@SelwynPellett Farming capital gains makes it hard to pay current expenses hence the need to externalise costs. Th… https://t.co/J1yevZAHft
14/08/2017 5:46 PM
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APR 11

Ineffectual OCR reinforces need for change




The cut in the Official Cash Rate (OCR) stands to do little for New Zealand’s economy. It may take some pressure off the currency which will help exporters, but with the Christchurch earthquake and an economy in recession the dollar is likely to be on a downward track in any event. With interest rates already low another slight drop is unlikely to get further investment over the line.

The real issue is that an interest rate differential between New Zealand and other western countries over a number of years caused overseas credit to come in creating two problems. Firstly it overvalued the New Zealand dollar reducing the profitability of our exporters and secondly it fuelled the housing bubble that has blown out household debt levels.

A far more effective way of stimulating and restricting the economy to counter economic cycles would be Loan to Value Ratios (LVRs).

LVRs allow the Reserve Bank to specify a minimum deposit for the purchase of any type of asset. This prevents banks offering zero or low deposit debt in times of free credit that can lead to asset bubbles and eventually financial failures. The economy can be stimulated by loosening these requirements in tough economic times.

In a recent paper called ‘Policies for Macrofinancial Stability: Options to Deal with Real Estate Booms’ from the International Monetary Fund recognised that:
“macroprudential tools (such as maximum loan-to-value ratios linked to the real estate cycle) appear to have the best chance to curb a boom. Their narrower focus reduces their costs. And, in the case of measures aimed at strengthening the banking system (such as dynamic provisioning), even when they fail to stop a boom, they may still help to cope with the bust.”

The OCR is a blunt tool that has caused significant damage to the tradeable economy. It is time we looked at more targeted controls to ensure that we do not continue to rack up further debt and hinder the tradeable sector in the process. Canada are implementing such controls, we must too.
 


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