Thursday, March 13, 2014

Lucia NZ - Land of the Big Hammer

In order to stop future inflation, the Reserve Bank has decided that our interest rates, already the highest in the world, need to be raised even more, thus increasing mortgage inflation. In an economy that is starting to recover, the Big Hammer comes out again making sure that the middle class stays down.

Reserve Bank governor Graeme Wheeler lifted the official cash rate a quarter-point to 2.75 per cent in the first move of a tightening cycle, and signalled potential for a steeper track for future hikes as he tries to prevent inflation accelerating.

"While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years," Wheeler said in a statement. "The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures."

Thanks, Graeme. I wish we could vote this bozo out.

Related link: OCR up to 2.75pc ~ NZ Herald

1 comment(s):

mjaew said...

Hi Lucia Maria.

I have been looking at this issue a lot over the last few years. The problem in New Zealand (and exacerbated in the larger cities) is Local Councils who restrict land supply. Because of this restriction, combined with growing demand for housing, the cost of land has gone up astronomically.

The result of that is extremely unaffordable housing in Auckland and Christchurch. What infuriates me about the left-leaning council's policy is its disregard for the poor. We are now in the position that on average the cost of a median priced house in Auckland is 8 times the average household income; comapre that to family of mine in the USA where it is around 3 times. The impact this has on families and especially on poorer people, is catastrophic. The left want the poor to stay poor so that they have to 'rely on the state'.

The Reserve Bank can't set Council policy, but they are extremely alarmed at the subsequent increases in house prices. Some of it is because foreigners can see there is money to be made in residential investment, and they have assets/cash that are in excess of what an average New Zealand family has. Other families in New Zealand take on two jobs and have mortgage stress. Other families simply can't afford the mortgage, so they rent. Home ownership is declining in NZ. Change Local Governmetn policy and foreigners will stop buying for speculative reasons.

To counter the inflationary damage that the Local Council policies are inflicting on New Zealanders, the Reserve Bank raises interest rates, in trying to dampen demand for housing (and therefore prices; I'm sure you're familiar with the logic :)). Yes it hurts your family, my family and the economy. But if we don't then we risk an Ireland style real estate crash or a US style crash - which only happened in cities that practise land supply restrictions, not in other cities (approximately 100) across the USA which doesn't practice land restrictions. The jury is still out as to whether the Reserve Bank's actions will avoid that problem, but to do nothing could present bigger problems.

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