KEY POINTS:
Reserve Bank Governor Alan Bollard has today raised the official cash rate (OCR) 25 basis points to 7.5 per cent.
Despite pressure from a multitude of quarters to keep the OCR at 7.25 per cent, Dr Bollard decided the economy was overheating and needed cooling.
>> Read the story
This forum debate has now closed. Here is a selection of your views on the topic.
Thomas
Well done! This move is long overdue, and the housing bubble and mindless spending spree need to be contained after three-four nitro-charged years, and this is the role that only the reserve bank could play. Now is the time for the government to do its part to reduce business taxation to reduce the pinch felt by the business community and we could soon be on the road to recovery. Failing that, and the economy will really suffer.
Stephen Thoms
Yes but too little too late. If he was independent of Cullen (which he is meant to be!) he would have raised the OCR before the last election. He would have then very strongly stated that large government spend-ups, massive council rate increases and other compliance increases will cause the very problems NZ now finds itself in. He would also be strongly stating that OCR increases are to control inflation. The intention is not to slow the economy! With a clever Reserve Banker and clever fiscal (government) policy you can have high growth, low inflation, low unemployment and lower taxes. We have seen that implemented in the USA over the last few years.
George Saunders
I can't believe that people complain about a high dollar! A high dollar benefits consumers, a high dollar makes businesses get off the grass and seek productivity gains (rather than waiting for easy profits), a high dollar is the reflection of a strong economy, a high dollar gives easier access to overseas research and technology.
Only third world economies deliberately push for low currency. The constant cry for a low dollar is a clear representation that the New Zealand mentality of the 60s and 70s is too ingrained in the culture. Let's move on from that stage and recognise that the stronger the currency, the higher the standard of living.
Well done, Bollard! I look forward to continuing OCR increases.
HR
If the Reserve Bank feels by raising OCR it can check the house prices and curb borrowing for buying a house well it will be achieved to a limited extent. In my opinion there are better way of managing housing market.
Options are:
1.Introduce capital gain tax on investment property. This may not happen because most Politicians, business community have investment properties
2.Introduce differential interest rates(make it mandatory)Higher OCR for lending made for second house or investment properties to discourage too many investors chasing the available houses in the market. This way there would a price correction in housing Market and the owner occupancy will improve
Raj Subramanian
It is the same Government, who raises finance in Millions in Uridashi and EuroKiwi Bonds in foreign domestic markets(especially the cheap Yen-Japan market) to spend lavishly on unproductive Government Expenditure, which is now advocating through Reserve Bank that People should not spend money. The world financial markets are unnerved by last month's market-fall because of carry-forward trades and Cheap bond finances from Japanese Investors like our Govt. did.
RBNZ tightens the financial market through interest hikes. If they consider Business expansion and House Sale/Mortgages are the problem for increasing Inflation I am sorry, Dr.Bollard should first advice the government from being spend-thrift. How many unproductive new jobs were created in Govt. Sector in this term? By increasing the cost of business finance, business expansion-plans will be put under shelf. Instead of cutting personal and business taxes to encourage productive growth, this Government just wants to tinker only with headline business-taxrate from 33 to 30 per cent just as knee-jerk symbolic act. This will not benefit anybody except the faces of the Govt.
They should first identify Personal Tax cuts to show that they really seen what is happening outside of NZ . Our country has already become uncompetitive Tax-wise and the added fuel is interest-rate hike. Dr.Bollard did his best to disrupt our economy.
John
Again NZ continues to lead the OECD as the country with the highest interest rates by far. I am tired of a government who is intent on killing business growth through encouraging the high dollar and hurting our exporters and punishing the hardworking with higher interest rates and taxes. The housing market is affected by much bigger drivers than interest rates, things like mass immigration and foreign property investors. But why do we need so many immigrants? Because people like me and on average 130 other NZ citizens leave this country every single day for a better life elsewhere.
Walter Walraad
I think NZ is on the wrong path when it comes to raising the OCR every time to dampen the economy in general and the housing market in particular. Because property (the family home)is the main investment for most New Zealanders to safeguard and save for retirement due to a lack of other alternatives, the Government should look at introducing positive alternative options for saving and at the same time take back excess money from the economy which in turn would have a good effect on the inflation rate. This could be done by introducing employment based superannuation, where the employer and the employee both contribute to a compulsory superannuation scheme, like the one that was introduced in Australia some years ago. In the long term this would put the economy on a much more even path and would dampen the boom and burst cycle that has been New Zealands fate for to long.
Fred
The increase should have been half a point and at the same time the NZD should have been devalued by 40 per cent to scare the carry trade and the housing market. The deficit has with complete knowledge of Mr Cullen gone way out of hand and sooner or later a devaluation will have to happen. It is about time that National and Labour sit around the table for a devaluation solution instead of passing the problem on to the next election. It is so scaring what Mr Cullen/Labour is allowing. The carry trade has nothing to do anymore with free market trade. Got that Cullen?
Rosemary Wakeman
It seems to me Mr Bollard is punishing the citizens and businesses of NZ without addressing the real issue. The effect of offshore investment (in Bank Accounts!) and increased immigration causing competition for homes. It makes it harder for NZ owned companies to invest in new plant and R & D and limit their growth and increase the cost of rental and Mortgage interest for NZ born citizens.
Lets find away to make homes affordable. Perhaps all those Japanese Mum an Dads with money in NZ Bank Accounts could be taxed unless their money is used for cheap mortgages for first home buyers?
Perhaps Residential Real Estate in NZ can only be owned by residents?
How about Tax breaks for investment in new plant and R & D for companies.
Alwin
Bollard has definitely got it all wrong. If he looks back to when this rising expenditure started, he will see that it coincided with the extra money that the government put out in its working for families funding. Certain households suddenly had about $80 more per week to spend. Homeowners are battling to make ends meet, with rates, insurance and mortgage payments. A simpler, shorter, more effective measure would of been to raise GST about .25 per cent and this should have happened two years ago. At least this would of affected everybody and not those of us who are working very hard to stay off government assistance.
Sanjay Maharaul
I personally believe its not a good move as it will hurt the farmers most its like a double whammy their margins will go down and they will have to pay higher interest rates for the money they borrow. NZ economy is mainly dependant on farmers the rise is house prices is due to rise in economic fortunes of this sectors and there by pushing prices in the rural areas this factor should have been considered.
Charles Lowndes
Land is not consumed, so should not form part of the consumer price index. Land remains even when converted from farmland to new housing suburbs. The land is always there.
The value of the improvements on the land (houses, for example) are consumed because they wear out (depreciate) over time and need replacement, so they are "consumed", albeit over a 50+ year period.
Dr Cullen should remove the land component from the housing index but leave in the movement in construction materials and general building costs, thus reducing inflation, interest rates and improving our export industries' performance.
The increase in new construction cost as an element of house price inflation should also be offset by the depreciation of older housing stock. At present only one side of the ledger is accounted for by the CPI. This is inappropriate because housing itself is consumed only over a very long period of time, unlike all the other instant or short term consumables accounted for by the CPI.
Individually or better still combined, these changes will in a short time make housing "more affordable" because additional wealth generated through exports will flow into real income gains across the nation. The growth in the export sector will offer the stock market more breadth, thus attract additional investment away from heavy reliance upon the housing market.
Only then could Dr Cullen afford to wear the Cheshire Cat look with which he is so satisfied and which was captured beautifully on the front page of today's Business Herald.
Grant Diggle
The obvious question is why do we have an OCR? We gave away exchange controls price controls etc over 20 years ago. Before that we had been told the world would end if this happened. It didn't. Interest is the price of money. And to cap it off the mechanism has failed. Increasing the OCR hasn't achieved the desired effect It a failure. All it does is penalise business. Exporters get a double whammy with the interest rate and the exchange rate moving against them. The beneficiaries are those who have money in the bank and those who travel and spend Kiwis overseas. What logic drives this. Get rid of the OCR and let the markets decide. Just like they do with every other commodity.
Simon Barnaby
Everytime we as a family think we are working harder and start to see ourselves getting a head this man kicks us in the head. Why is it that he is fixated in his mind that the only cause of inflation that can do anything about is the housing market. Is it because one of the other major causes of inflation is Government spending? Oh I forget Mr Bollard reports to the Minister of finance. Roll on the next election, that is if there's any hard working New Zealanders left in the country then.
Michael Draper
Yes, Bollard made the right decision, in fact he should have raised the ORC earlier, however if his main concern is the rising house price, raising the OCR this level is not enough or doing very little to ease house inflation, the capital gain tax on investment property mentioned in his statement is in my opinion far more effective than raising the ORC which also will increase risk to push NZ dollar even higher. So time for action now.
Ferdi Doktoroglu
Even British Newspapers are full with adds encouraging people to invest in the New Zealand property market because there is no capital gain tax for profits gained with property speculations. Even if you sell one kilo tomatoes on the market you are supposed to pay income tax. But if you buy a house for a million and sell it after 6 months for two million, nobody asks for a tax payment. I believe the Government should work on this problem instead of keep increasing the interest rates.
Hamish
Bollard should have hiked rates this time last year instead of just "threatening" to do it for all of 2006.
Tu Nguyen
Raising the interest rates is wrong. It will not affect the housing market because interest rates have very small influence on the supply and demand in the housing market. On the other hand, higher interest rates hurt business by increasing cost, discourage investment, make exports more difficult (higher value of NZ dollar).
Brian Felton
I'm not an economist but I think I understand basic money principles. If the OCR is increased the demand for the desirability of the NZ$ by overseas investors increases, and therefore the NZ$ becomes stronger against the "basket" of currencies we see it compared to each day on the News. But, aren't we an exporting economy and don't we need our dollar to be a little weaker than it is against the currencies of those Countries that are our major export markets. So, why do we continue to increase the OCR which appears to increase the value of the NZ$, which makes it cheaper to buy oil, cars and all the other imports, while we screw the primary producers of NZ. And I'm not a farmer!!
TK
Given his brief, Bollard took the only option available. If the government really cared about ordinary kiwis they'd stop pandering to the international rich and baby boomer speculators (voters)and stop housing inflation. Implement a capital gains tax and put in place some proper rules around foreign ownership - now.
Pat Fields
Did Bollard make the right decision? The answer is a categorical "NO!" - he should have raised the OCR by 50 basis points (not 25). Rampant government spend plus the herd mentality of property "investors" (read the financially unsophisticated middle class) are pushing core inflation to the levels of a typical banana country (as if we weren't already!).
Eileen
It's a right decision. In fact it should have had been made earlier.
David
Well he could have solved the problems earlier with a shock 0.5 per cent rise in November or before. He could have also done the same thing today. He gets no help from a gutless Government that has all the tools to quell the property market should the so wish.
Arifin
I think its good, coz NZ needs to cool the overheating economy...and the carry trade can come back faster and everyone needs to do carry trade especially investors.
Dawid Roos
A better and more justified move would have been for him to force banks to hold a larger portion of all their credit (supplied to lenders) in cash. Restricting the seemingly endless credit is more justified than punishing responsible home owners with a rise in their mortgage rates.
