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Thursday, October 27, 2005

6.75% or 7%?

WIll the Governor of the Reserve Bank raise the interest rate today? Almost everyone thinks he will - and if he does it will keep our exchange rate high and make our current account deficit worse; but will supposedly reduce inflation as businesses cut back and mortgage repayments suck money out of consumer demand. It's a blunt instrument that may not be working too well for this economy. As we are repeatedly told: NZ's central bank has the highest rates of any developed country.

Many are concerned that the official cash rate's (overnight rate) influence on monetary policy is becoming less effective for various reasons as banks find other sources of finance and their liquidity rates apparently are so loose they can now loan out at 100% of a property's value! Despite Cullen trying to talk the dollar down, poor business confidence and the inflation target blow-out our dollar is still over €0.58c which is very high. It is a perverse vote of confidence by the rest of the world in our precarious little economy.

As I've said before the Reserve Bank could help our exporters out by popping the exchange rate bubble by saying inflation will be at 4% next quarter and not raising the rate. It would fall then... surely. But Dr Bollard's mission is to get inflation under 3% - and you do that in this system by raising the interest rate - regardless of all the other consequences.

3 Comments:

At 27/10/05 4:09 pm, Blogger Bomber said...

CO: Yes, I read that two guys in Singapore had made anti-Muslim remarks on their blogs and had pleaded guilty (?) or been sentenced (?) - I don't have a link for that either but maybe it's the same case? Or maybe Singapore does this on a regular basis. I wouldn't be surprised.

I see at NRT that Australia is contemplating the same sort of draconian type laws that go well beyond our sedition laws and penalties and they will introduce them on Melbourne Cup Day! How's that for a cynical manoeuvre. That Liberal Party is a total misnomer under John Howard - it's conservative with a capital K. Maybe he's embracing "Asian values" (as Mahatir Muhammad used to lecture).

 
At 31/10/05 12:00 am, Blogger Bomber said...

Capital gains tax - I don't think we need one - as Cathy has said before it already exists in reality (but is not really enforced). I was under the impression that if someone sold a property within 7 years of purchase the value increase counts as income and is taxed - that could be crap though - the test could be a pattern of property purchases and sales that amount to trading? I can't be bothered searching out the data or rules or rulings because I'm under the impression it is dealt with already. I would prefer additional methods to control inflation.

Brash when Governor raised the issue of him contolling the tax rate - which was rightly condemned. However if there was compulsory contributions to super schemes that could be tweaked up and down to help control inflation that would be far superior to changing tax rates on the whim of Herr Governor! Singapore did this in the 80s when they put the super rate up to 20% (or was it even more than that?). The other way is through a credit squeeze by upping the reserves banks need to keep with the RBNZ. These ideas are at an early stage so I'm not 100% about the other effects they might have or how effective they could be on inflation.

 
At 31/10/05 1:09 pm, Anonymous Anonymous said...

Property "trader" status, in IRD's opinion, is very loosley applied/interpreted to the point where it's essentially discretionary on IRD's part, as to whether you are or are not trading. They're concerned with 'intent' in your actions. One could buy and sell several properties in a year and still avoid being considered a trader. Doing that every year might have them crawling up your arse with a torch though, by about year three.

 

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