By Peter V O'Brien
Friday 28th April 2000
|Text too small?|
That was seen again last week when the bank lifted the official cash rate (OCR) 0.25% to 6% in a move to dampen inflationary pressure.
Virtually every observer picked the bank's decision in advance and they could probably have picked the consequent newspaper headline about likely rate rises for home mortgage and business finance.
Deputy Prime Minister Jim Anderton, who was acting prime minister when Reserve Bank governor Don Brash announced the OCR increase, has strong views on interest rates and their effect on unemployment.
His stand has long been contrary to those of finance minister Michael Cullen and it will be interesting to see whether principle or pragmatism wins out if there are more rate increases as the year progresses.
A win for principle could strain the Labour-Alliance coalition's approach to monetary policy issues.
It is obvious higher interest rates affect business development and individuals' borr-
owing costs but there is also the question of what is the lesser evil - higher costs and growth restriction or inflation running away as it did before central banks took charge of monetary policy.
The general interest rate structure in New Zealand has been volatile this year, as noted in an article on this subject in The National Business Review on January 21.
The table shows government stock yields and retail interest rates the day before Dr Brash's announcement, the position three months ago and yields and rates at the end of 1999.
Bank bill and government stock yields would have altered since the OCR was lifted and there will be the usual movements in retail interest rates, the extent depending partly on the institutions' reactions to the higher OCR and partly on the state of their borrowing maturities when set against the lending book.
The set-off against borrowing and lending usually gets scant attention from the headline writers, although there seems to be a growing awareness that one side relates to the other.
Since the awareness level appears still relatively low, let's reiterate a fundamental point about borrowing and lending in this country: there is more money lent to financial institutions than borrowed from them and it is immaterial that one house mortgage may involve more dollars than several individuals' total deposits or other monetary investments.
The point can be expressed another way.
An individual may have a house mortgage of $100,000 while five people have total deposits/debentures other non-equity investments of $20,000 each.
The total amount is the same in both cases but more people are involved in the institutional borrowing side of the equation.
The latter gain when interest rates go up and the former face higher outgoings.
There is a reverse situation when rates fall but the investors' income cuts get less publicity than the increase in mortgage payments when rates rise.
While that could be seen as a misplaced plea on behalf of the "rich," it should be remembered many people who have retail investments are the elderly retired who depend on interest for much of their income and have modest dollar returns from investments.
The general outlook for interest rates for the rest of the year is more increases in the OCR, assuming there is no sudden drop in current or potential inflation rates.
Potential inflation is the important element in the bank's decisions on the OCR because it is required to keep within the target range of 0-3% and that is an ongoing target, not a historical adjustment.
A gradual approach to movements in the OCR and similar gradual adjustments in wholesale and retail rates should avoid the situation that occurred a few years ago when there was a sharp increase in rates and a subsequent sizeable drop.
In the latter case, for example, there was a cut from 8% to 4.7% in retail rates on 12 months' money from January 1998 to January 1999.
While the Reserve Bank is in charge of setting the OCR and controlling inflation, the government also has a role through its fiscal policy. The Budget is coming up soon and the spending side of the government's policy will be watched closely, with a resulting impact on interest rates.
Decisions on government are multi-dimensional exercises and the public should not see them as a Labour versus Alliance matter or, more simplistically, as Mr Anderton versus Dr Cullen.
Interest rate yields
|Govt stock maturity||Rate (%) 18.4.00||Rate (%) 18.1.00||Rate (%) 31.12.99|
No comments yet
NZ dollar rises after Orr talks up the economy
Comvita posts $27.7m net loss on goodwill write-downs
Buyers emerge for Denton Morrell client book
WEL reviewing capital structure of fibre business
Cavalier announces strategic collaboration with NZ Merino Company
Delegat continues to invest after record year
Kiwibank's annual profit eases as fee income drops
TIL lifts operating earnings, watching for slowdown
Vector profit slides 44% on struggling HRV writedown
Steel & Tube returns to the black but says margins are squeezed