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Trading Banks are Not Central Banks
I am not in any sense a “bank hater” – that oh so popular persona favoured by numerous customers who seem to forget that:
- there are no free lunches
- that they love secure deposits
- that but for debt most homeowners would never get to buy a house
- that in NZ a significant tranche of Australian shareholders bear the risks of lending
Still – that is no reason to either listen or take too much notice of trading banks busily telling the RBNZ what to do – a highly popular sport amongst trading bank “analysts” at present. There is no reason to suppose that trading bank analysts have any better idea of how to do the RB’s job that the RB itself – dangerously however for the rest of us – they do know their own bank and its strategy all too well and are, in this sense no different to (say) the liquor industry advising on what our liquor laws should be – simple rent seekers.
A few things we do want from the RBNZ are:
- consistency over time in policies reflecting the long term (which is not the next quarter) objectives for a strong economy,
- Independence – in particular independence from objectives such as growing a residential debt book, or getting “new homeowners into homes”,
- a medium to long term view and a set of behaviors which are consistent with that view and the broad direction of the governments overall (not just monetary) policy.
- A firm stance which stands back – well back – from the noise of trading banks and others seeking whatever interest rate matches their tactical position over the period till they next report.
Adoption of this boring but highly functional approach has been shown to serve us well.
When political decisionmaking is a bad choice
Recent years have seen an increase in political involvement in large scale projects which essentially have little to do with politics. Why is that a problem?
Political decisionmaking is aimed, at bottom at producing votes. It matters little whether votes for left right or centre – the output is votes.
Problem is:
- votes do not produce health treatment
- votes do not produce plant and equipment
- votes do not produce roads, or bridges or infrastructure
Indeed they produce votes. Nothing else (more than a few nasty side effects as well).
And yet our politicians and their govts are donkey deep in decisions about these outputs yet we need them quite regardless of whose got the votes, they need to be financially sound, they need to match demonstrated needs of myriad groups and individuals, they need to be professionally designed and delivered and they need to work.
Votes and those who hold them have little or no expertise in any of these domains – they are politicians ever bound by aspirations of gaining and maintaining power.
Their better contribution would be to:
- stay out of pretending they have expertise. Simple truth is – they don’t
- stick to setting and maintaining rules for independent professionals who do know what they are doing
- holding such independents to account by rewarding success and penalising failure (heavily) promptly
- growing some expertise in supervising contracts (of all kinds) that will produce the outcomes needed regardless of votes.
The fraught balance
It is difficult to ascertain reliably whether long run political stability or instability favours economic growth and welfare. The Economist July 20th 2024 suggest this useful distillation:
“It is a fraught balance-neither extreme instability nor extreme stasis, all while staying within the bounds of civilised discourse. That this balance has been the norm for decades in much of the West is a miracle. To lose it would be a tragedy.”
Time to take notice.
Smart Way to Think of Govt Debt
Reuters reports that in the US:
“Short-term government borrowing rates are cranking towards the 6% mark for the first time in history – not far off the rate you’d expect to pay on a 30-year mortgage, with all the risk that this would entail.”
Next Quarter: Daylight Not Cash Saving
ASB expects: We expect the OCR to move up soon. Our forecasts have 50bps of OCR hikes by the end of the year and assume a historically low OCR endpoint of 1.50% by late 2022. Mortgage interest rates have already been on the move and look set to continue to climb. We envisage a historically low peak in average mortgage interest rates this cycle. How will moderately higher interest rates impact the household sector? There are 3 channels:
1) House prices – higher mortgage interest rates should sharply slow housing market momentum, with prices largely expected to flatline over 2022.
2) Economic activity – the gradual pace of OCR hikes that we envisage is unlikely to derail the economic expansion and so shouldn’t significantly weigh on household incomes and employment.
3) Cashflow – The average mortgage rate for housing lending of just under 3%, a record low, which has bolstered household debt servicing. NZ households are net borrowers from financial institutions, so an increase in customer interest rates will reduce household cashflows. Our estimates suggest a 100bp increase in customer interest rates will reduce household cashflows by roughly $2.6bn per annum, approximately 1% of household disposable incomes. It’s not immaterial, but our assessment is that the increase in debt servicing costs should be manageable for most households. Borrowers with large debt exposures will clearly fell the cashflow hit. Some will struggle.
Eye2theLongRun 