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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JUL 12

The same old problem...

Cost Price Inflation figures released by Statistics New Zealand on Tuesday revealed that the same divide between the domestic and external economies that had haunted the tradable sector last decade are back. Headline inflation was at 1% year on year, but domestic inflation had reached 2.4% while traded inflation was at -1.1%.

We have dual problems emerging in the economy – an export sector destroyed by an overvalued exchange rate and the early indicators of another land and buildings bubble. History has shown we cannot deal with both issues using only interest rates.

This chart shows what happened last time around in the mid 2000s. Another round of low export returns and increasing debt in the domestic economy will further push our economy out of balance and drive even greater deficits in the current account. That is unsustainable.

The price of credit has proven to be an ineffective regulator of domestic demand. An increase of say two percent in the price of mortgage credit is fairly insignificant if house prices are expected to increase between 10 and 20 percent. This has meant that the tradable sector, which has caused little inflationary pressure, has worn the brunt of Official Cash Rate hikes through their impact on the exchange rate.

Regulatory controls on the supply or demand of credit are necessary. An interest rate cut is needed to relieve exchange rate pressure on the export sector, but this will only inflame the problems brewing in the housing sector if no changes are made. Prudential requirements of higher capital reserves for asset backed lending are needed to offset the impact of lower interest rates on asset markets.

We cannot simply continue to plug on with the same failed strategy. Adjustments must be made to the implementation of Reserve Bank Act before the new Governor starts to ensure we have a monetary policy framework that works for the whole economy.

tags: cpi, ocr, two economies, reserve bank act, exchange rate
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