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Odds on early election shorten

Monday, March 14th 2005, 10:29PM 5 Comments

by Philip Macalister

The Reserve Bank's decision to raise the Official Cash Rate last week has been designed to slow the economy down, but I wonder if it may also speed the election process up.

In the wake of the RB's move rates on variable home loans are going to hit 9%. Westpac, which is normally the first to move and the bank with the highest rates, has already put its floating rate up to 9.05%.

The other banks haven't done anything yet, but they will undoubtedly follow this week.


What's striking is that 9%-plus interest rates are expensive and they must have a big impact on borrowers. Whatever way you look at it 9% is a big number. If you are getting 9% on a deposit you think that is a good return, conversely to pay 9% to borrow money isn't cheap.

Why would the odds of an early election shorten? If you think back to the recent Australian and US elections a key factor of success, particularly for Howard, was how they appealed to the so-called mortgage belt.

In New Zealand this group is well served with cheap two-year home loans but these favourable rates won't last forever. Once the impact of higher interest rates flows through to borrowers it will hit them hard.

These traditional blue collar, middle-class New Zealanders won't be happy.

Throw into the mix some politics (Act in disarray, National trying to make up its mind what it stands for) and you have a good case for an early election.

So what are the odds? I'm not sure; I think they are still long, but a bit shorter than before.


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Comments from our readers

On 15 March 2005 at 6:35 am Jens Meder said:

In a stable currency market economy higher interest rates would normally reflect a need or demand for more savings. But if they attract only foreign savings, would that not feed rather than hold back inflation? And how would locally raised unspeculative capital - such as that of the NZSF - affect the economy, if invested locally at lowest profitably possible interest rates in say, taking over foreign financed home mortgages?

Jens


On 17 March 2005 at 4:23 pm Malcolm Eddington said:

The purpose of higher interest rates is not to attract further savings per se in the case of NZ. The high levels of household debt means that the effect of higher interest rates will be to surpress consumer spending and business investment.


Any fund manager (such as managers of the NZSF) have an obligation to invest in asset classes that provide the strongest returns for risk and there is a good argument that some NZ debt assets provide this at present. However, the reduced premium that is on offer for corporate and mortgage debt at present would lead one to look to Goverment debt and the cash rate as the best instrument to investment rather than mortgage debt. And that is problem - investors (largely overseas) see the high cash rate and play the carry game with NZ vs USD/JPY/CHF/EUR government debt but the consumer in NZ has embraced a risk aversive 2-3 year terms on 75% of home loan debt. Hence, it will not be until the term rates increase (financed largely from the US Bond market) that we will see NZ consumers begin to hurt in any tangible way. So while there is general concern in the higher cash rate - it is hardly an uproar. When the US Bond rates begin to hike the the pain will be more acutely felt with the refinance rates on cash and term debt increasing. Only then will the effect of higher cash rates hit hard - when there is nowhere to hide except by reduced spending for the purpose of debt reduction/management.


On 22 March 2005 at 9:54 am Mr Reasonable said:

Hi Phil,

With all this negative publicity about the finance companies (put out by FundSource?) is there a risk to the NZ financial system if one of the more shakey ones defaults on its obligations. Is that something that the RBNZ will have taken into account? With rates rising, the banks will find it easier to attract deposits away from the non-banks finance cos who, I understand, are a bit hand to mouth right now.


On 26 March 2005 at 2:46 am Jens Meder said:

Not challenging the basic validity of anything said by Malcolm Eddington, but just for the joy of discussion I would like to draw attention to the following:

If high levels of household debt mean that the effect of higher interest rates will be to suppress consumer spending and business investment (on credit - because wouldn't higher interest rates actually encourage investment of savings in business?) - then - with due respect to Malcolm's complicated chain of reactions - there can only be wholehearted approval with the conclusion that, when "higher cash rates hit hard.... there is nowhere to hide except by reduced spending for the purpose of debt reduction/management". (And what else can that mean in practical terms, than a higher savings rate WITHIN THE GIVEN INCOME?)

Why is there such a widespread reluctance to agree, that there is no alternative to a higher rate of saving for investment and reserves, if accelerated economic growth and security are the goal? If we had a consensus on this, we could get on with the job with confidence, unafraid even of deteriorating terms of trade and phases of trading cycles.

Doesn't that also answer the concerns of Mr. Reasonable, regarding hand-to-mouth operating finance companies?

Jens.


On 28 March 2005 at 10:32 pm Philip said:

Mr Reasonable - good question. A couple of points worth noting is that the FundSource report is actually quite balanced - not that you would pick that up from the mainstream media.

While finance companies have been attracting significant sums of money it is still small beer in the big picture.

My thoughts are that while no one wants to see a collapse, the regulator's approach is one of hands-off. As long as there is sufficint disclosure, caveat emptor.

A question was put to one of the speakers at the FundSource conference about why there aren't more perscriptive rules around how a finance company can be set up. The answer, from memory, was that NZ bases its rules on disclosure rather than rules and that's the way it is.


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Lender Flt 1yr 2yr 3yr
AIA 6.35 5.25 5.45 5.99
ANZ 6.34 5.59 6.05 6.29
ANZ Blueprint to Build - - - -
ANZ Special - 4.99 5.45 5.69
ASB Bank 6.35 5.25 5.45 ▼5.69
Avanti Finance 6.65 - - -
Basecorp Finance 7.25 - - -
Bluestone 6.89 - - -
BNZ - Classic - ▼4.95 5.39 ▼5.69
BNZ - Mortgage One 6.39 - - -
BNZ - Rapid Repay 6.39 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 6.39 ▼5.55 5.99 ▼6.29
BNZ - TotalMoney 6.39 - - -
CFML Loans 7.25 - - -
China Construction Bank - 5.35 5.80 5.99
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - ▼4.89 - -
Co-operative Bank - Owner Occ 6.25 ▼4.99 5.39 5.89
Co-operative Bank - Standard 6.25 ▼5.49 5.89 6.39
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 5.35 5.85 -
Heartland Bank - Online 4.60 4.90 5.29 5.39
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.50 5.60 6.00 -
HSBC Premier 6.34 5.09 5.34 5.59
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 6.00 ▼4.79 5.15 ▼5.69
Kainga Ora 5.85 5.31 5.58 5.97
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 6.00 5.95 6.45 6.79
Kiwibank - Offset 6.00 - - -
Kiwibank Special - 4.95 5.45 5.89
Liberty 4.84 - - -
Lender Flt 1yr 2yr 3yr
Nelson Building Society ▲6.95 5.55 6.15 -
Pepper Money 5.29 - - -
Resimac 5.59 6.54 6.44 6.98
SBS Bank 6.29 ▼5.39 ▼5.79 5.99
SBS Bank Special - ▼4.89 ▼5.29 5.49
Select Home Loans 6.89 - - -
TSB Bank 7.05 ▼5.65 6.09 ▼6.39
TSB Special 6.25 ▼4.85 5.29 ▼5.59
Unity 5.65 4.95 5.55 -
Wairarapa Building Society 6.49 5.55 6.15 -
Westforce credit union - Special - 5.35 5.85 -
Lender Flt 1yr 2yr 3yr
Westforce credit union - Standard 5.85 6.05 6.55 -
Westpac 6.39 ▼5.55 6.05 ▼6.29
Westpac - Offset 6.39 - - -
Westpac Special - ▼4.95 5.45 ▼5.69
Median 6.34 5.33 5.79 5.93

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