Thursday, April 24, 2008

Slumping so fast- even the Reserve Bank notices!!

So interest rates stay where they are, and Reserve Bank Governor Alan Bollard hints rates may come down sooner rather than later, perhaps even this year, as he sees the economy slowing faster than he expected.
As the table in the link shows, Cullen has left us with a legacy of the highest interest rates amongst our main competitors.
Bollard also makes some interesting comments, not all of which will amuse Mr Cullen.
The Herald reports of Bollard:
But he also pointed to the impact of repeated increases in food and energy prices which, he said, played a large part in short term inflation being likely to remain persistently high.
"There is a risk that wage settlements respond to these short term price shocks rather than adjusting to the changing economic conditions, thus perpetuating inflation pressures," Dr Bollard said.
Over time, the weaker economy would ease accumulated pressure on resources and reduce inflation pressures, but the labour market was still strong and New Zealand's key international commodity prices remained high. Government spending plans and the possibility of personal tax cuts could also be expected to limit the economic slowdown.
So let us get this right. Higher fuel cost will cause inflation and keep interest rates high.
Now, side from the international situation, what do we see at home? We see government policy on biofuels, emissions trading and allowing regional council petrol taxes, could see a further 40c a litre on current fuel prices
Thus, by driving up fuel prices, government policy will fuel inflation and thus keep interest rates high, thus deepening our impending recession!
Mr Bollard also advises unions to keep a lid on payrises, so any inflationary pay rises, will be lost in higher mortgage rates too.
And he notes the'possibility' of tax cuts will be good for growth, in helping to stave off recession.
Brian Fallow today notes how the economy has been mismanaged under Liarbour. There has been no productivity miracle, creating real wealth, just an inflationary, credit card fuelled spending binge on the back of rising property prices.
Right now we face the aftermath of an extended borrow-and-spend binge.
Consumption grew faster than incomes and faster than the economy's productive capacity, propelled by the wealth effect from an exceptionally strong housing boom.
The result has been a toxic build-up of inflation, a blowout in the country's external accounts and 71 per cent increase in mortgage debt over the past four years.
And looking at the biggest causes of current inflation, he reports:
The ANZ National Bank's economists have looked at the past two recessions, in the early 1990s and the Asian crisis. In both cases non-tradeable inflation did indeed abate quickly, lagging activity by about a year.
But they point to factors that might make this cycle different and inflation more persistent, especially in sectors immune from competitive pressure. Among them are the impact of fuel surcharges, the emissions trading scheme and relentlessly rising local body rates.
So when you see your high mortgage bill, and the current economic troubles, you know who to blame, but Liarbour!

1 comment:

Anonymous said...

RadioSocialism, economic report, between 7.30 and 8 this morning. Commentator Cameron, working for ANZ & National bank said (my paraphrase):

The problem with interest rates is that although the real ecnonomy is tanking, interest rates will stay high. That's because employment and wage rates are through the roof. Interest rates will only come down when unemployment goes up, and wage rates come down to a level commensurate with productibity

No this isn't ACT; it's not the IER; it's radio socialism

This is all Cullen's fault: completely squandered the benefits of 1985-1990, and now we are facing worse situations than 1984 and 1993 combined