Wednesday 15 July 2009

What did I miss?

A week ago, the RBNZ worried a lot that the banks were shafting customers by not passing along the Reserve Bank's interest rate cuts. Of course, banks do have to compete for deposit funds; it's not like they can underwrite mortgages based on overnight borrowing at the RBNZ.

This week, the RBNZ instead is worried that recovery in the New Zealand housing sector may presage a return to our old "borrow and spend" ways: in other words, we need to do something to encourage more saving and less borrowing. What is it that affects that...ah, right. The interest rate. So a week ago the RBNZ berated banks for interest rates being too high; today, Bollard berates consumers for responding to interest rates being too low. Which is it? I suppose that new information could have come into the system in the interval about housing sector recovery, but it would suggest that perhaps folks oughtn't have been so quick to criticize the banks in the first place.


  1. The Bank is torn between wanting unemployment not to rise (to avoid a paradox of thrift type crisis) and wanting consumptions share of GDP to fall - so they want lower interest rates for businesses to stimulate investment and higher interest rates for consumption.

    Or in other words, they want households and businesses to act as if the government has flattened the tax base - even though it hasn't.

  2. It seems like Bollard was careful to avoid mentioning that low interest rates could stimulate increased consumption (as if he was afraid to wake the beast..).
    Hence, whether he meant it or not, he seemed to be attacking the institutional provocateurs of the "spend" mentality rather than the interest rate itself.

  3. Matt: Is your explanation consistent with that the RBNZ seemed to complain most loudly (as far as I could tell) about home mortgage interest rates rather than about lending rates for business?

  4. Is the RBNZ's concern about banks not passing on reductions that the banks are dampening the signal, rather than about the lack of reduction per se?

  5. @Burgess: either way, it's inconsistent with then wanting less borrowing and more saving.