Odds on early election shorten

In a stable currency market economy higher interest rates would normally reflect a need or demand for more savings. But if they attract only foreign savings, would that not feed rather than hold back inflation? And how would locally raised unspeculative capital - such as that of the NZSF - affect the economy, if invested locally at lowest profitably possible interest rates in say, taking over foreign financed home mortgages?

Jens

The purpose of higher interest rates is not to attract further savings per se in the case of NZ. The high levels of household debt means that the effect of higher interest rates will be to surpress consumer spending and business investment.

Any fund manager (such as managers of the NZSF) have an obligation to invest in asset classes that provide the strongest returns for risk and there is a good argument that some NZ debt assets provide this at present. However, the reduced premium that is on offer for corporate and mortgage debt at present would lead one to look to Goverment debt and the cash rate as the best instrument to investment rather than mortgage debt. And that is problem - investors (largely overseas) see the high cash rate and play the carry game with NZ vs USD/JPY/CHF/EUR government debt but the consumer in NZ has embraced a risk aversive 2-3 year terms on 75% of home loan debt. Hence, it will not be until the term rates increase (financed largely from the US Bond market) that we will see NZ consumers begin to hurt in any tangible way. So while there is general concern in the higher cash rate - it is hardly an uproar. When the US Bond rates begin to hike the the pain will be more acutely felt with the refinance rates on cash and term debt increasing. Only then will the effect of higher cash rates hit hard - when there is nowhere to hide except by reduced spending for the purpose of debt reduction/management.

Hi Phil,

With all this negative publicity about the finance companies (put out by FundSource?) is there a risk to the NZ financial system if one of the more shakey ones defaults on its obligations. Is that something that the RBNZ will have taken into account? With rates rising, the banks will find it easier to attract deposits away from the non-banks finance cos who, I understand, are a bit hand to mouth right now.

Not challenging the basic validity of anything said by Malcolm Eddington, but just for the joy of discussion I would like to draw attention to the following:

If high levels of household debt mean that the effect of higher interest rates will be to suppress consumer spending and business investment (on credit - because wouldn't higher interest rates actually encourage investment of savings in business?) - then - with due respect to Malcolm's complicated chain of reactions - there can only be wholehearted approval with the conclusion that, when "higher cash rates hit hard.... there is nowhere to hide except by reduced spending for the purpose of debt reduction/management". (And what else can that mean in practical terms, than a higher savings rate WITHIN THE GIVEN INCOME?)

Why is there such a widespread reluctance to agree, that there is no alternative to a higher rate of saving for investment and reserves, if accelerated economic growth and security are the goal? If we had a consensus on this, we could get on with the job with confidence, unafraid even of deteriorating terms of trade and phases of trading cycles.

Doesn't that also answer the concerns of Mr. Reasonable, regarding hand-to-mouth operating finance companies?

Jens.

Mr Reasonable - good question. A couple of points worth noting is that the FundSource report is actually quite balanced - not that you would pick that up from the mainstream media.

While finance companies have been attracting significant sums of money it is still small beer in the big picture.

My thoughts are that while no one wants to see a collapse, the regulator's approach is one of hands-off. As long as there is sufficint disclosure, caveat emptor.

A question was put to one of the speakers at the FundSource conference about why there aren't more perscriptive rules around how a finance company can be set up. The answer, from memory, was that NZ bases its rules on disclosure rather than rules and that's the way it is.