KEY POINTS:
This morning Reserve Bank governor Alan Bollard carried out his threat to raise the Official Cash Rate (OCR) to 7.5 per cent.
Our jury were unanimous in recommending "no move" on interest rates from the central bank today.
So, now that it's a done deed, what are their reactions?
Michael Barnett - chief executive, Auckland Chamber of Commerce
The Reserve Bank interest rate hike with a threat of more to come in an environment where growth is projected to be 1.8 per cent per cent but should be 4 per cent if we are to compete with nations we like to compare ourselves with, is hard to follow. With Export Year 2007 underway, we should be doing everything possible to encourage more growth, not reinforcing a continuing trend of a contracting manufacturing sector.
Targeting the housing sector when government sourced inflation is the real culprit is disappointing.
The Reserve Bank's assessment of alternative measures to support the OCR and encourage a growth-led economy is taking far too long and should be completed with urgency.
In short, the implication for business of the interest rate hike and the Reserve Bank's reluctance to directly challenge government-sourced inflation will be to 'hunker down' and focus on survival rather than growth.
> Read Michael's comments from before today's announcement
James Lockie - director, General Finance
We were disappointed with the increase in the OCR although not surprised.
The Governor is still focusing on the housing market to the exclusion of the export sector. We believe that this is short-sighted.
It may well be time to look at the objectives of the Reserve Bank in relation to controlling inflation with a single tool – interest rates. More coordination is required between the Government and the Reserve Bank on inflation, which is driven as much by Government spending as a buoyant housing market.
With the Governor talking of other measures to control housing, such as tax changes and bank capital requirements, a further rise in the OCR in the near term is unlikely.
> Read James' comments from before today's announcement
Kathryn Palenski - on maternity leave with her 10-month-old son
Bollard's announcement that the OCR has increased by 0.25 per cent this morning has no impact on our personal situation. We are investing our money outside of the housing market and looking to buy again sometime over the next year.
Over the next year we will keep an eye on what the Reserve Bank do with the OCR, and continue to monitor housing and deposit interest rates. If rates moved significantly in the next 12 months we would have to reassess our situation, as to whether we leave our money invested or buy another house sooner than planned.
> Read Kathryn's comments from before today's announcement
Dr Ganesh Nana - senior economist, BERL Forecasts
Sadness is my immediate response to an increase OCR at a time when all indicators suggest inflation on average over the medium term to be well within the 1 per cent per annum to 3 per cent per annum target range. My sadness is further deepened by the suggestion contained in the announcement that "depending on the persistence of the current upturn, a further tightening may be required".
The central tone of the decision is that the New Zealand economy is growing too fast, unemployment is too low and the housing market is not helping.
Buying low inflation by placing New Zealand in a growth straitjacket is admitting defeat in the war against inflation. By having interest rates amongst the highest in the OECD, implies we've given up on New Zealand businesses, enterprises and workers delivering the investment and productivity improvements needed to fight inflation. Rather, the price of fighting inflation will continue to be paid by businesses, enterprises and workers in the export sector as their competitiveness erodes away in the face of an export-unfriendly exchange rate.
The one note of encouragement in the announcement is the admission that "alternative measures that might support the OCR" are being assessed. It appears that the rules of the game have changed. Housing excesses appear now to be included in the mix along with the 1 to 3 per cent CPI target range. If so, let's make the rules of this new game clear and let everybody know through an explicit revision of the Policy Targets Agreement.
> Read Ganesh's comments from before today's announcement
Don Nicolson - vice president, Federated Farmers
I am disappointed but unsurprised by today's increase in the Official Cash Rate. The Reserve Bank has been talking tough and sooner or later it was going to respond. Inflation is being driven by domestic consumption while farmers and exporters are continuing to bear the brunt of monetary policy through an overvalued dollar.
There seems to be no stopping the housing market and the consumption binge. There are no easy or quick fixes, but the Government can and should do its bit by realigning its policies to make the Reserve Bank's job easier. It must cut back on the rapid growth in its spending and it must ensure that all its policies will improve competitiveness and productivity so the economy can be re-balanced.
Farmers will be closely watching the impact on the New Zealand dollar in the coming days and weeks.
> Read Don's comments from before today's announcement
Phil O'Reilly - chief executive, Business NZ
With an annual growth rate of 1.4 per cent, the economy could be doing better.
Today's decision to lift interest rates won't help new businesses start up or existing ones grow.
It will harm the productive sector while not doing much to restrain household spending.
Clearly, monetary policy 'needs some mates' - too much pressure is being placed on interest rates as the sole mechanism to influence monetary policy.
The pressure could be lifted if the Government showed more discipline in spending and regulating.
Poor quality spending decisions - e.g. around student loans and the 'Working for Families' package that gives welfare to already comfortable families – are helping to drive inflation.
Regulatory policies could be improved too. For example restrictive regulations over land use for housing is creating artificial scarcity and inflating property prices needlessly.
The Government, and many households, are spending like sailors, pushing up the cost of credit for business and making it harder to grow the economy.
Interest rates alone won't fix that problem.
>> Read Phil's comments from before today's announcement
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HERE'S WHAT OUR JURY WAS SAYING YESTERDAY:
James Lockie - director, General Finance
We believe that the Reserve Bank should cut the official cash rate by 0.5 per cent.
The tightening of monetary policy over recent years has left New Zealand with the highest interest rates in the Western world.
But this policy is not working. Every time interest rates rise, the currency goes up and those with mortgages merely switch from higher floating rates to cheaper long dated fixed rates.
Real harm is being done to our economy. Exporters (our main employment creators) are hurting, as are first home buyers and young families with large mortgages. It stops some from even purchasing a new home.
A drop in the official cash rate [OCR] would have little effect on the housing sector, but it would see our currency easing. This would assist our exporting sector and likely slow down imports, benefiting our current account deficit.
Don Nicolson - vice president, Federated Farmers
The high Kiwi Dollar has been hurting farmers and exporters. Farm incomes have been squeezed at a particularly difficult time following three years of sustained increases in farm expenses. The net effect has been a severe erosion of profit margins over the past two seasons and less for farmers to invest in their businesses and in rural communities.
Most farmers want the Reserve Bank to keep inflation low. I accept a need for higher interest rates to dampen strong consumer spending but I am concerned that exporters are feeling the brunt of monetary policy.
Unfortunately there are no quick fixes or easy answers. An underlying problem is wider government policies making the Reserve Banks job harder. The Governments big spending ways are helping to push up consumer demand at the very time the Reserve Bank wants to see moderation while a creeping re-regulation of the economy has been pushing up costs and reducing flexibility.
Both central and local government must commit to ensuring that all its policies and decisions not just some of them are designed to improve the economys competitiveness and productivity so giving the Reserve Bank a hand and ensuring that the economy can grow without generating inflationary pressures.
The Reserve Bank says it understands the plight of exporters and others sensitive to exchange rate fluctuations. I am sure it will carefully weigh up its decision.
Kathryn Palenski - on maternity leave with her 10-month-old son
We recently sold our house and are planning to rent for the next 12 to 24 months while we look at what we want to do. The OCR increasing this Thursday would be beneficial to us as we are investing the capital we released when our house was sold; an increase in liability interest rates is great for us.
An increase of 25 basis points will not alter our decision on where to invest (short vs long term), we have invested in an online call account for now and are looking at short term deposits (120-180 days) as the rates are good and they allow us flexibility.
Although current housing interest rates are higher than they were a few years ago, they are still reasonable and if we were looking to buy a house at the moment an increase in the OCR would not affect that decision.
Dr Ganesh Nana - senior economist, BERL Forecasts
What would I like to see in the next Reserve Bank monetary policy statement?
1) No increase in the official cash rate.
2) A strongly-worded statement from the Reserve Bank that the medium term outlook for inflation remains well within the 1 per cent to 3 per cent range as specified by paragraph 2b of the policy targets agreement. Yes, some inflation measures are elevated, but all are heading in the downwards direction and, on average over the medium term, there is no reason to expect further increases in the official cash rate.
3) A similarly strongly-worded statement that it is neither the Reserve Bank's role, nor the function of monetary policy, to control house prices. The Reserve Bank remains focused on maintaining a stable general level of prices as specified in paragraph 1a of the policy targets agreement.
4) Commentary stressing the importance of non-housing sectors of the economy. Those narrowly focussed on the housing sector risk overlooking the long-term damage to the economy caused by sacrificing the NZ export sector in order to rein in the excesses of the housing market.
5) Advice to the Minister that should he wish the housing market to be the focus of the Reserve Bank, then there needs to be:
a. a change to the Reserve Bank Act;
b. a revision of the policy targets agreement incorporating a properly specified house price inflation target; and
c. most importantly, the Reserve Bank would need to be empowered to use another policy instrument or tool, as the official cash rate alone will not succeed in achieving a house price inflation target.
Phil O'Reilly - chief executive, Business NZ
Given many homeowners are on fixed rate mortgages, small-scale tinkering with interest rates is unlikely to be effective.
Changes in monetary policy need to be less frequent otherwise they will simply put more pressure on the exchange rate while having minimal impact on household consumption.
The Reserve Bank risks being seen as crying wolf too often.
Whatever Alan Bollard does tomorrow, the next thing he should do is talk to Michael Cullen about how Government can be a friend of monetary policy rather than half the problem.
Handing out free money to students and giving welfare to families on much more than the average wage are prime examples of Government being part of the problem rather than part of the solution.
Dr Bollard could also usefully ask the Government what its doing to help the productive sector to be more competitive on the world stage, so the state of our dollar becomes less of an issue in future
Michael Barnett - chief executive, Auckland Chamber of Commerce
The Reserve Bank should hold the official cash rate at 7.25 per cent and instead strongly challenge the non-competitive government-sourced inflation to be brought under control.
While I expect the Reserve Bank will raise the OCR to 7.50 per cent, the more important message in tomorrows statement will be the extent that the Governor addresses where the inflation we do have is coming from.
Very clearly the productive sector has been contracting over the past 18 months, while the non-competitive or government sectors of the economy have been expanding and are the root cause of most of our inflation.
It wont be enough to put up interest rates and blame strong retail and/or housing sectors when government spending is the real culprit.
If the Governor doesnt make the challenge to curb government-sourced inflation he will be open to the counter charge of "Why not?"
