Thursday, May 03, 2007

Highest OCR in Western World

New Zealand bank interest rate is so high. The Reserve Bank has been trying its damnedest to dampen the economy so as to tame the inflation to target rate of 0-2%.
Much of this high inflation figure in contributed by the rising property values. For the past year alone average house prices rose by 10%.
The latest OCR rise prompted 2 large manufacturing companies to move manufacturing plant to China and Thailand, Fisher & Paykel and Click Clack.
The New Zealand Dollar also rise to the highest level in 25 years, fueled by hot money from Asia and Japan, the so called Yen carry trade.

So the focus now is the VERY high property prices. It is simply locking out first home buyer from getting their foot into property market. The Govt rightly identify this as possible problem in the future because it creates disenchantment and a group of people feeling disenfranchised, not having a stake in the country.
But the solution so far is far from solving the problem.

You see, from my view this is a classic problem of supply and demand. Regulations, environmental restrictions imposed by local councils, slow 'follow the maze' rule at local councils in the past decade has restrict new house supply. New immigration and Kiwis returning from overseas further compound the demand side. What is worse, residents associations and local council deliberately does not approve new land for housing to restrict supply (so that their property values increase faster) in the early 90's and 2000's.

So far the Govt solution is throwing money into it; eg new scheme of no/low deposit loan called Welcome Home Loan, and the proposed Government Equity Scheme. Throwing money will simply add fuel to the fire.

I am still waiting for the classic solution of 'build more housing for the people' for first home buyer, low income group and the homeless. Simply more money for Housing New Zealand to build more houses or apartments in cities.
And for goodness sake, cant Housing New Zealand just sell their high value properties to release capital?

Date 26 April 2007
The Official Cash Rate (OCR) will increase by 25 basis points to 7.75 percent.
Recent indicators confirm that the resurgence in economic activity that began in late 2006 has continued over recent months, with domestic demand continuing to expand strongly. As we noted in March, demand is being fuelled by a buoyant housing market, increases in government expenditure, a rising terms of trade, ongoing net immigration, and a robust labour market.
The lift in domestic demand is placing further pressure on already-stretched productive resources. Firms report that capacity is very stretched and that they are again experiencing increased difficulty in finding both skilled and unskilled staff. Consistent with these pressures, non-tradables inflation has remained persistently strong and has recently shown signs of re-acceleration.
The trade-weighted exchange rate has risen further, which will exert some downward pressure on medium-term inflation. The exchange rate is now at levels that are both exceptional by historical standards, and unjustified on the basis of medium-term fundamentals. Parts of the export sector continue to face challenging conditions, but the recent sharp lift in world dairy prices is expected to provide a boost to incomes in that sector and tourist arrivals are continuing to grow.
There has already been a recent rise in fixed mortgage interest rates. This further increase in the OCR is aimed at ensuring that inflation outcomes remain consistent with achieving the target of 1 to 3 percent inflation on average over the medium term.
For further information contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021 497418,

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