Hold those rate cuts

Urgent and expectant press stories about the likelihood of fast, generous, rate cuts ignore the level of inflation, and consider only the housing "crisis". This is as if the only thing that mattered was protecting middle class households from the reality that housing is, sadly, just like any other asset class. Wake up! It's not a special juniour investors asset where nanny state makes sure there are never any losers.

The reserve bank, unless they've been slipped a change in orders, is supposed to target an inflation rate - not a minimum level of house price inflation. The first thing that happened after the release of the worst shrinkage in employment in 11 years was that the NZ dollar fell sharply. It's since fallen further. That'll push up the cost of petrol, and therefore add more to the cost of food (which has a high component of transport costs in) and the extra we need to pay to import capital.

So, with plenty of imported inflation we'll be unlikely to see a very big fall in interest rates - if we see one at all. We will see a further de-coupling of the metropolitan economy from the rural one. The former slowing, the latter still growing. It's going to take a while to sort all this out. The pain, in the meantime, will need to be explained to ordinary kiwis who have got used to being told you can have your cake and eat it too.