The Reserve Bank of New Zealand will announce its next Official Cash Rate decision on August 20.
Peter Nicholl
Lots of people are giving them advise. Most expect the bank to lower the cash rate again by 25 basis points – and some are saying they should lower it by as much as one per cent – 100 basis points. A lot of points being made in the debate are being misused and some important points are being left out altogether.
First, current interest rates are invariably described as high. They are only high in relation to the very low interest rates that existed at the time of two recent crises: the global financial crisis and the Covid crisis. It is these rates that were unusually low. The average interest rate on mortgages in New Zealand over the last 20 years was similar to the current interest rates. People with longer memories, like me, will know that mortgage interest rates in the 1980s and 1990s were much higher. We need to stop describing current interest rates as high – they are average.
Second, the discussion about the impact of lower interest rates on household disposable incomes focuses on only one side of the impact: the disposable income of mortgage borrowers. It does go up when interest rates come down. I have not seen anyone do a calcualtion of what happens to the disposable incomes of savers when interest rates come down. But clearly, their disposable income drops. Total household debt in New Zealand is about $390 billion. Total savings and time deposits in banks is around $310 billion. So when the disposable incomes of mortgage holders goes up when interest rates fall, most of that is a transfer of disposable incomes from savers to borrowers.
Piggy bank.
Third, some are saying that the reserve bank has got interest rates wrong again by leaving them too high. John Key for example made this claim and recommended the bank lower the cash rate by a full one per cent. The implication is that the bank is dragging the chain compared with other Central Banks. That simply isn’t the case.
The bank has lowered the cash rate further this year than its peers in Australia, Canada, the UK and US. Only Canada has a lower official interest rate than New Zealand and their inflation rate is also significantly lower. Australian and US inflation rates are currently similar to New Zealand and their official interest rates are higher. I see absolutely no scope for the Reserve Bank to lower its rate by one per cent on August 20. If they do, the value of our dollar will sink. That might be good for exporters but it would be lousy for inflation.
I don’t think the bank should lower the cash rate at all – but they probably will by another 25 basis points to three per cent.
