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02-05-2014

Tony Alexander reviews Labour's new Kiwisaver policy

http://tonyalexander.co.nz/

This week we take a look at Labour’s proposal to make Kiwisaver subservient to Reserve Bank monetary policy desires and conclude on a number of fronts that it is not a good idea, though good on Labour for giving thought to alternative monetary policy weapons. One major problem nobody else seems to have picked up on is that forcing people to save more when the economy and share prices are soaring will exacerbate share price gains and cause people to buy more shares when prices are high.

Then when the economy is weak and share prices low and or falling, people will be forced to buy fewer shares thus worsening price declines. Labour’s policy would unfortunately exacerbate share price volatility and reduce long term Kiwisaver returns as people would be forced to buy high and buy less when prices are low.

Their policy would also tend to boost household and external debt because lower and less volatile interest rates will make borrowing money safer. That will in turn encourage more investment in housing, especially as returns to term deposits would on average be lower, and that would price housing even further out of reach of young families. Labour’s policy would also tend to boost bank profits through not just raising debt levels and giving banks more Kiwisaver business, but encouraging people to stay floating rather than fixing, given reduced risk of interest rate shocks. Bank margins are bigger on floating than fixed rate loans.

But again, good on Labour for thinking outside the square to try and address the issue of the interest rate impact on the Kiwi dollar.

Tony Alexander's complete weekly commentary can be found here - http://tonyalexander.co.nz/

Tags: kiwisaver

Source: http://tonyalexander.co.nz/

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