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Cameron Bagrie's Economic Report

Cameron Bagrie's Economic Report

Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.

7 October 2021

Snakes and ladders

House prices outside Auckland are still climbing, and are up 7.2 per cent on a year ago. Auckland house prices are falling. Why are they falling and the regions still going up? Affordability.

Boxing banks

It’s gloves on for our Reserve Bank versus the banks.

Reserve Bank: In the Reserve Bank corner, we have a plan for banks to hold more capital to make them safer and ensure that taxpayers are not on the hook if anything major goes wrong. The Big Four banks have an implicit government guarantee: if something went wrong, we taxpayers would likely foot the bill.

The banks: In their corner, the banks are fighting back, saying the plan will force up interest rates and make it tougher for some sectors to get credit, assuming they keep making current profits. Dairy’s already feeling the pinch. What seems lost in the debate is that the pre-tax return on equity for the banking sector in New Zealand is close to 20 per cent. That makes ours one of the most profitable banking sectors in the world – and a lot more profitable than Australia.

Inflation’s up (and down)

Inflation fell from 1.9 to 1.5 per cent in the March quarter, driven by lower fuel prices and dropping airfares. That’s sent a signal the Reserve Bank should be cutting interest rates. Non-tradable inflation – domestic and locally generated inflation – has accelerated to 2.8 per cent, the largest rise in five years.

It’s scary out there

The famous tag-line from TV show Hill Street Blues, “Let’s be careful out there”, appears to apply.

The bad news: Europe’s struggling, growth in China’s slowing and the world has more debt than it did before the 2009 Global Financial Crisis. Many governments have high debt, the population is ageing, populism is rising, and there are concerns over trade wars. Incredibly low – and in some places negative – interest rates have distorted the price of risk. The International Monetary Fund’s warned of rising risks. For now, they’re risks, not reality.

The good news: New Zealand has some localised problems, but we’re in a far better place than we were in 1996-97, before the Asian crisis, and in 2007, before the Global Financial Crisis. The Reserve Bank is being more proactive – inflation is low, which allows it to be. The Government’s finances are strong. Our international debt position has improved. But the global economy is very interdependent and we’re a part of it. What happens out there matters.

Borrowers party

Good news for exporters and borrowers. The Reserve Bank has cut the Official Cash Rate and is ready to cut it again if the economy warrants it. Interest rates have fallen and so has the New Zealand dollar. We’ll take the interest rate cut but remember the reasons for it, including weaker domestic growth and worries over the global scene, are rather concerning.

Airfares – chop-chop

There’s good news for travellers, with Air New Zealand aggressively discounting airfares across certain travel periods and times. This is long overdue into some regions. But it’s also responding to competition and less travel demand, both offshore and locally. How do you stimulate demand? You chop the price.


It’s good news that the proposed capital gains tax has been binned. As soon as the family home was ruled out, any proposal just wasn’t going to cut the mustard and would hit the earnings side of the economy too hard. The economy has many storm clouds above it already, but taking a capital gains tax off the table just made the weather a little less overcast.

Savers suffer

If you’re a saver, lower interest rates are bad news. If the OCR moves down, it doesn’t tend to be for good reasons, either. The Reserve Bank is concerned about prospects for the global economy. New Zealand’s not immune from global developments. Our economy is still performing okay, but growth in real gross domestic product (GDP) has eased to 2.3 per cent. That’s like driving along the motorway at 80km/h when the speed limit is 100. We’d like to be, and could be, moving faster.

All data correct as at 9 May 2019

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