3. Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this
to the Minister of Finance
How do rising interest rates affect New Zealanders’ cost of living?
Hon BILL ENGLISH (Minister of Finance) Link to this
Interest rates are currently at 40-year lows. Last week, as a result of the recovering economy, the Governor of the Reserve Bank lifted the official cash rate for the first time since the middle of 2008. This lift will affect people in different ways. It increases returns on savings, which will assist groups like superannuitants, who generally hold lower levels of debt and higher levels of savings. On the other hand, rising interest rates increase debt-servicing costs for mortgage holders and businesses. The member will be aware of that, as he was part of a Government that saw the floating mortgage rates reach 10.9 percent, and saw an official cash rate of 8.25 percent as recently as 2008.
Hon David Cunliffe Link to this
When putting together his recent Budget 2010 tax package, what consideration, if any, did he give to the extra pressure that $1.l billion of extra borrowing would put on Governor Bollard to raise the official cash rate?
The tax package is, in fact, broadly fiscally neutral, with some timing differences that lead to about a $400 million shortfall in the first year. I think the member needs to keep in mind that when interest rates are at a 40-year low, one thing is certain: they will eventually return to normal levels. Those normal levels for the official cash rate are quite a bit higher than the current rate.
Craig FossThe Reserve Bank’s Monetary Policy Statement points out that a range of measures were used to combat the global crisis. These included fiscal stimulus, a very sharp reduction in interest rates, and offering deposit guarantees. To date these measures have been largely successful: the financial system is sound, and the economy is growing again. To the extent that these measures are no longer needed, and the economy is growing again out of recession, interest rates will begin to return to normal.
Hon David Cunliffe Link to this
How does he expect New Zealanders to meet the extra mortgage payments that he says are now normal under National, when their tax cut will be eliminated by inflation rising to 6 percent?
The member is wrong about the tax cut and inflation, as we discussed at select committee. But I think New Zealanders are well aware that an increase in interest rates means that it would be good for those who have too much debt to try to reduce that debt. It also means that savers who saw their incomes cut dramatically through 2007 and 2008 will be looking forward to some increase in income from their savings.
How will the Government’s management of the economy help keep interest rates lower than they would otherwise have been under previous Government policies?
The point here is not so much whether there will be increases in interest rates—that is inevitable, not just in New Zealand, but around the whole of the developed world—but the extent to which we can ensure we do not repeat the mistakes of the past, which were to foster a speculative boom in property and fast-rising Government expenditure. Those were the policies of the previous Government that caused so much damage to this economy.
Hon David Cunliffe Link to this
Can he confirm that higher interest rates will make life tougher for Kiwi businesses, which face higher loan costs and, if they export, potentially higher exchange rates as a result?
There is no doubt that for people who hold debt, an increase in their interest rates means more outgoings to service that debt. But I think we all ought to be quite realistic here. When interest rates are at a 40-year low, and interest rates are starting to rise from levels of 1 and 2 percent around the world, we are bound to have an increase in interest rates, which will put pressure on people who are holding debt. Our task is to ensure that that cycle is not as vicious as the last one, which that member’s Government oversaw.
Hon David Cunliffe Link to this
On top of increased mortgage payments, increased childcare costs, and recent increases in power, what other price movements can he expect hard-working New Zealanders will face as a result of his Budget?