ANALYSIS: One of the main characteristics of monetary policy tightening periods in New Zealand since the 1980s has been rapid appreciation of the Kiwi dollar. High interest rates in New Zealand have generated flows of short-term money seeking good yields and this has pushed the Kiwi dollar upward.
The stronger currency would cause profitability problems for exporters and in particular those in the primary sector largely shipping minimally processed commodities offshore. Our news feeds would be filled with stories of struggling farmers and manufacturers closing down as well Kiwis enjoying cheap holidays overseas.
Pain from the monetary policy tightening would tend to start in the exporting regions and only slowly feed through into the cities. And when the pain did reach the cities the intensity of it would be constrained by the fact the economy was already suffering from lower exporter incomes.
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This time around things are very different. At the same time as interest rates have risen strongly in New Zealand, they have also gone up rapidly overseas. This means that we have not seen flows of hot money into New Zealand money market assets and the Kiwi dollar currently sits over 5% lower on average than it was three years ago.
This is good for exporters because they are not feeling an extra degree of monetary policy pain. But it is bad news for homeowners with mortgages because it means that more of the burden of restraint on the economy from high interest rates has to be borne by these very people and not shared to the same degree with the farmers as was the case previously.
On the face of it this might seem like a good situation because growing exports and maintaining one’s export base tends to be the best way to achieve good economic growth and growth in household incomes over the long term for an economy. But in New Zealand we seem to be failing to achieve these outcomes even with our newly constrained currency.
Independent economist Tony Alexander: "Household spending changes are becoming a more important influence on our overall economic performance." Photo / Fiona Goodall
Back in the 1970s the ratio of our exports of goods and services to the size of our economy averaged close to 24%. The ratio improved to average 29% in the 1980s and 1990s, 31% in the 2000s, and 28% in the 2010s. It is now 24% having been at 27% just before the pandemic.
Even with our currency newly suppressed, the strong growth in our exports to China over the past two decades, development of sectors like aquaculture, viticulture, and horticulture, we are failing to grow our export base as far as we are growing our economy overall. This is a problem because household spending changes are becoming a more important influence on our overall economic performance and when households pull their horns in there is not the potential offset from exporters doing OK as happened before.
The main housing market implication for this particular cycle is greater weakness than would otherwise be the case and a greater reliance of the Reserve Bank long-term of influencing consumption and housing when they both tighten and loosen monetary policy. That means no one should assume once interest rates fall, they will enter a new golden period of stability, or that the house price cycle will settle down to only mild fluctuations.
Volatility is going to stay with us from here on out and it will pay borrowers to remember that when mortgage rates once again reach whatever their lows are going to be – whenever that does happen to occur. Fixing for just one year has been the lowest cost interest rate strategy since the end of the Global Financial Crisis. But that may not be the case once the much-anticipated easing cycle kicks off hopefully before the end of this year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
