Peter McIntyre.
New Zealand runs the risk of prolonged deflation if banks
do not loosen their lending to businesses, Otago Chamber of
Commerce president Peter McIntyre says.
The Reserve Bank will on Thursday release its Official Cash
Rate review. Westpac chief economist Dominick Stephens called
the review ''walking a fine line''.
''We doubt the Reserve Bank will alter its `on hold' stance
for the OCR, for fear of stoking the overheating housing
market,'' he said.
However, Mr McIntyre said changes were needed to the way
banks were lending ifNew Zealand was to avoid deflation,
where industrials and corporates held off making decisions on
investment because they believed interest rates would go
down.
''They have money sitting there, doing nothing, in the belief
things will get cheaper. Japan is a great example of
deflation. It is in a '20-year funk' which is so hard to get
out of.''
Banks were comfortable lending to those people wanting to buy
property, Mr McIntyre said.
But people wanting to establish a business, or establish a
strong business ethic through expansion, were finding it much
more difficult to borrow.
Asked about New Zealand retail banks advertising they were
lending to business, Mr McIntyre said the banks were lending
to the ''bigger end of town''.
''New Zealand is full of small and medium-sized businesses
[SMEs], whose owners are forced into the default position of
increasing their mortgage or putting their personal property
up as security.''
The Reserve Bank needed to review its inflation targets and
if it wanted 2% inflation, it then needed to make changes to
the lending ratio of retail banks, he said.
There should not be a return to lending 95% of funds for
property purchases, just because banks were looking for a
safe return of capital and interest.
Mr McIntyre agreed that some banks had been hurt by the
global financial crisis and, therefore, were cautious in
their lending. But he challenged them to take on more risk
themselves for the benefit of the New Zealand economy.
Mr Stephens said the Reserve Bank confirmed late last year
its ''on hold'' stance for the OCR. Reducing the OCR from its
present 2.5% was not discussed.
Equally, the forecasts implied that any OCR hikes were a long
way off, and would be modest.
''For the first OCR review of 2013, we expect the Reserve
Bank will repeat the main themes of that story. But recent
low inflation and the high exchange rate mean the details of
the press release will probably be more dovish.''
That may involve softening the comment on inflation - perhaps
to something like ''inflation is now expected to rise towards
2% more gradually than previously assumed'', Mr Stephens
said. Inflation was just 0.9% for 2012, compared with the
Reserve Bank's forecast of 1.2% That was the sixth
consecutive inflation outcome below the Reserve Bank's
expectations and, once again, the surprise was low prices for
internationally tradeable goods and services.
The constant direction of those surprises hinted at some
change in the economy's structure that could keep tradeables
inflation subdued for some time yet, he said.
''The Reserve Bank will also mention the exchange rate has
risen even further since December, further dampening the
inflation outlook. Global economic and financial market
conditions are such that the New Zealand dollar may go higher
still over coming months and the Reserve Bank may fear as
much.''
Low inflation and the persistently high exchange rate had
prompted Mr Stephens to alter his own interest rate forecasts
from his previous forecast of September and he now expected
the OCR to remain at 2.5% until December this year.
Other bank economists have pushed out their forecasts for the
first rise in inflation to March and, in one case, June of
next year.
Mr Stephens said Westpac's long-held view had been that the
buoyant housing market and the Canterbury rebuilding would
provoke greater inflationary pressures than the Reserve Bank
current anticipated, requiring tighter monetary conditions.
''It now seems the high exchange rate is set to provide more
of the necessary monetary tightening, leaving less work for
interest rates,'' he said.
Definition of deflation
A general decline in prices, often caused by a reduction in
the supply of money or credit. Deflation can be caused also
by a decrease in government, personal or investment spending.
The opposite of inflation, deflation has the side effect of
increased unemployment, since there is a lower level of
demand in the economy, which can lead to an economic
depression. Central banks attempt to stop severe deflation,
along with severe inflation, in an attempt to keep the
excessive drop in prices to a minimum.
dene.mackenzie@odt.co.nz
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