Reserve Bank Chief Economist Yuong Ha says there's no evidence to suggest monetary policy is less effective the lower interest rates go

Reserve Bank Chief Economist Yuong Ha says there's no evidence to suggest monetary policy is less effective the lower interest rates go

Reserve Bank (RBNZ) Chief Economist Yuong Ha says there’s no evidence to suggest we’re hitting a tipping point where cutting interest rates no longer stimulates the economy.

Speaking to following the RBNZ’s shock decision to cut the Official Cash Rate (OCR) by twice as much as expected to 1%, Ha said: “The world may be changing around us - changing in very different ways, and we may have to react differently.

“But the bottom line is, interest rates still affect investment and spending decisions the way they always have.

“We looked at some international work and our own recent work and there’s no evidence to suggest that policy is any less effective at these low interest rates.”

Ha expected the RBNZ to publish research on this issue in the next two months.

“We have been watching and we will continue watching how OCR changes are feeding through to retail deposit rates and hence economic activity, but the work[ing] assumption is, it’s business as usual.”

Ha said that with the average size of deposits across households being about $100,000, and the average mortgage being $400,000, interest rate cuts would affect borrowers much more than they’d affect savers. So the net effect would be stimulatory.

He said negative interest rates were in the “realms of possibility” even though they weren’t in the RBNZ’s forecasts at present.

Ha wouldn’t be drawn on how much lower he believed banks would cut lending rates in an even lower, or negative, interest rate environment.

He said the RBNZ’s work on what tools it could employ, like quantitative easing, was “ongoing”.

Pushed on how the public was meant to have confidence in what is largely an unknown in the New Zealand context when due to market sensitivity the RBNZ can’t detail its options, Ha assured the central bank was “on the game”.

For more on the RBNZ's rationale, watch the interview and see this story written further to press conference following the OCR cut. 

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Given that RBNZ is doing all it can to maintain (asset) price stability, we can all agree the central bank should get an A for effort!


Let's look at this a different way.

1. Savers (especially pensioners) will reduce spending if their TD rates fall.

2. Borrowers are mainly on fixed rate mortgages so there isn't an immediate benefit with cutting OCR except for the very small percentage who are on variable rates.

3. Businesses. These have been squeezed a lot with the hike in minimum wage so I can't see a whole lot of capex going through with a rate cut.

So who is this looser monetary policy going to have rushing for the ATM and boosting consumer spending ?


Bank shareholders.

Won’t savers have to invest their money in business due to low rates - increasing productivity and GDP


Stunned by the naivety of this comment. Savers want their savings in as risk-free investments as possible, to at the least preserve their capital. Investing in business carries risk often disproportionate to the reward, especially small business. If, however, by ‘business’, you mean shares, consider that the person with savings/cash pile has been in the share market, has had enough of all the monitoring required even with managed funds, has sold up on approaching retirement and seeks a safe haven. It is very glib to say savers will invest in biz and increase productivity & gdp, sort of wishful thinking unconnected to reality. I wonder why you even posted that. Spruiking or a govt plant?

Are you saying there is no correlation between interest rates and saving rates? I certainly wouldn’t have my money sitting in the bank right now. Yes obviously some people don’t have much choice but not everyone.

Yes, lower TD rates push cash out of TD's into.... no... not productive economic ventures, into financial assets, shares and property mostly.


Do you really think that most of those with TDS will suddenly pull them out and invest where? I have a lot of cash in PIE TDS very deliberately and don’t much care what the nest interest rate is. Most of my portfolio is in the stock market and property,but liquidity is important to me. As the stock market continues its seemingly inexorable ascent,most bank depositors will be reluctant to enter the market,though I think a lot of money is going into inflexible property schemes.

It is quite easy to invest in "term deposit-like" products overseas. I can easily get 2.25% p.a. in Europe, with the added bonus of having my funds guaranteed by the local government (up to specific limits, of course). And I am ready and willing to do it.
The very moment the local NZ deposit rates get close to this threshold, I am ready to pull out all my bank deposits in NZ (over 2 mil NZ$) as soon as they mature, and send them overseas. I am not going to subsidise borrowers and parasitic house-flippers and speculators with ultracheap money. Orr can talk about negative rates all he likes, but he is going to play this game without my savings, for sure. There is a currency exchange cost to be taken into account, of course, and a currency risk due to the fact that your savings are in a currency different to the kiwi dollar, but this risk in my opinion is quite limited - the risks with the NZ$ are more to the downside than to the upside, in my opinion, given that there is still a differential in local rates between say the Euro and the kiwi dollar.

I definitely didn’t say most. Even if it was only 5% it would be significant.

As repeatedly stated by the Productivity Commission, our low productivity and poor innovation performance compared to our international peers is neither due to skill shortages nor a capital deficit, as widely believed to be the main causes.

In fact, we have a chronic issue of misallocation of skills and capital towards unproductive economic activities. The sheer number of technology and engineering workers who are lured away from quit productive jobs (design, etc.) to work as glorified middlemen (technical sales, recruitment) after a few years of training is mind-boggling.

As someone who worked in IT until recently the main reason people leave is poor management unfortunately. We need some way to get management in technology to the same level as other disciplines to break the cycle.

@ Glitzy .............. we are being treated by the Reserve Bank like mushrooms , kept in the dark and feed bullshit .

I suspect the real problem is a fear of deflationary pressure , and they are not going to come out and articulate that .............

Totally agree with you. Seems like housing is our country's only investment. We should look at Singapore's management of their economy. Nothing has changed with the progressive reduction of OCR

RBNZ C22 data, June quarter, 181 Billion aggregate deposits, Housing loans (mortgage) 192 Billion. Using Mr Ha's average 400,000 mortgage across households , would put aggregate household mortgage debt somewhere closer to 750 Billion, not a number remotely approached even when using rental / farm and any other bank debt. When it walks like a duck, stimulate it 4 times.
Edit from 750 to 720 Billion

Yes, a somewhat duplicitous use of numbers.

Are you questioning RBNZ's quant?

But have they got a handle on the concentration of household debt in the system? Are they simply working on the ‘loan’ size or are they looking at the total mortgage exposure (agglomeration of loans that form a total household exposure) against properties?
I’ve seen it posted on interest that they may have been getting this wrong.for a while.

Didn't he refer to the average mortgage for households that actually have a mortgage. The data series is an average across all households and only appears to be as at March quarter.

Can you explain where and how you got your figures please.

Apologies Heavy G, indeed C 22 March Quarter , released June. The section of the audio relates to 5.30- 6.15.
My comment was in relation to stimulus across all households . On one hand average deposits across all households are used, yet those households without bank deposits are included,( which may include households that have mortgages ,that is they do not have an average 100,000 on deposit) . On the other hand , by separating only the households with a mortgage , the impression that is being conveyed is that by cutting the OCR , (and indeed it is somewhat clarified ) , that it will provide a more broad based stimulatory effect, when this is pointedly not the case and should not be conveyed in such a way. I have no disagreement, that for approximately 600000 households reducing the OCR will provide variations of "stimulus"depending on mortgage size, however the net effect across all households , using aggregate deposits versus aggregate mortgages, notwithstanding any lag periods, will clearly not provide four times the stimulus. I could pose a question if , I were a household with a mortgage of 200,000, yet had 400,000 on deposit, cutting the OCR would not provide me with a better outcome when conveyed in its simplest form.

Before we follow the monetary playbook from other countries, shouldn't we ask ourselves whether or not we want to end up in their position?

We are in a much better position though due to low government debt. If the RBNZ runs out of fire power the government has plenty - very few governments do.


" there’s no evidence to suggest that policy is any less effective at these low interest rates"

However, there’s also no convincing evidence to suggest that the "policy" is effective at any interest rate (if by effective you mean stimulating productive investment as distinct from stimulating ponzi investing in existing assets)


Wrong: fear trumps potential gain every time. The scales have tipped. People aren’t swallowing confidence meme any more

Why is moneyless interest rate cut "stimulus" never enough? A constant stream of OCR cuts from April 2015 only beget more cuts due to a perceived fall in potential GDP. A strong economic recovery aside from not qualifying for GDP asset inflation is a distant memory for the majority of citizens.

I suggest Yuong Ha reads this paper, entitled:

"Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan"

Authors - Kang-Soek Lee & Richard A.Werner

And this excerpt:

Nominal GDP growth provides information on future interest rates better than interest rates inform us about future nominal GDP growth. Our empirical findings reject the canonical view that interest rates somehow affect economic growth, and in an inverse manner. To the contrary, long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined. This suggests that markets are not in equilibrium and the third factor driving GDP growth is a quantity – as shown by Werner, 1997, Werner, 2012a in the case of Japan (namely, the quantity of bank credit creation for the real economy - i.e., for GDP transactions, as the Quantity Theory of Credit postulates; Werner, 2013a). Link

"on the game"
So what exactly is the game, does anyone know. Or is the answer 42?

The “game” is about pretending that you’ve got clothes on when you plainly do not.

the other option is to admit they are irrelevant in the face of strong deflationary forces.

Thank you Andrew ...................... we have a problem with DELFATION , which is like that disease that you cant spell and the doctors are unsure about how to cure

Thank you Andrew ...................... we have a problem with DELFATION , which is like that disease that you cant spell and the doctors are unsure about how to cure

I hope they look st evidence that long periods of very low interest rates and QE have not had much stimulatory effect: Europe, Japan... who’s next? Australia and NZ?

I guess we are being very critical (rightly) but I guess they are working within the prescribed system. What if any ability do RBNZ have to promote new approaches?

Probably not much, including answering to the IMF.

Raise wildly against the trend to pump up the NZD so that we can buy up assets offshore whilst the rest-of-the-world devalues their currencies?

then crash the currency and repatriate the profits, win win.

Do these experts have any performance standards to which they are held to account periodically ?
Like if they say something will happen because of the actions they initiate, and if it does not, do they get fired or their pay reduced/bonus scrapped, etc ?
Or do we pay them to just shoot in the dark often, leaving us the suffer the mess they create ?

RBNZ are amateurs, how about zero, or even negative mortgage rates? I get paid to borrow money and I get paid rent...No deposit? that's ok as someone will pay to lend it to you.

A little misleading if my quick attempt at their loan calculator is right. It was a 0.5% mortgage, but the actual APR ended up at 1.7%.. so likely the actual mortgage cost is still >1% for the so called 0% mortgage.

I dont get it ........... what part of the economy are we trying to stimulate when we already at almost full employment, and there is a risk over over -heating the property market due to more stimulus ?

I , for one , will not be making any significant purchases either at home or our business , be it capital equipment , machinery or computers , etc as I see prices of everything coming down over the next two years.

And the cost of money is not even a factor , we have cash in the Bank and zero debt, so we dont need low interest rates to make buying decisions ..........

As an ageing former student of economics , the actions of the Reserve Bank are so counter- intuitive to everything I know and understand , and goes against the grain of 300 years of economic thinking starting with Adam Smith ...........

Methinks the Reserve Bank is worried about DEFLATION

We need a new John Maynard Keynes for these new times.

Strange times. Has to be related to unprecedented debt levels and propping the system up in the hope of getting ahead of the storm. RB are just another institution in the headlines scrambling to do what they can in the new world economy. What happened to paying back global debt. Fiat currencies may be under threat after his massive 10 year binge.

I don't understand 'monetary policy' and why NZ Reserve Bank believes there's no room for lower interest rates. It's confusing. I'm based in Europe, paying 2.4% mortgage interest rates. My bank actively encourages reduction of mortgage debt and makes it easy for me to pay off debt. With no penalties. Totally unlike anything I've experienced with NZ/Australian banks. Two different topics, I know, but they're linked. I believe NZ consumers are being fleeced every day by the financial system.

Fleeced, perhaps, but the shearers have their blades set quite high, and the sheep aren't feeling cold, just yet.....

Well I've watched this twice and it's still hard to believe we are at this point. All my life we boomers have been told to save save save and look after our future retirement, here we are being told to spend and not save. Banks have to have savers/depositors to be able to lend ??
What I got overall from this is negative interest rates are coming for sure, surely this will just make money chase yield somewhere ? Another property boom ????

Where's RP going to put his TD's ? My feeling is that at negative rates the system is broken and risky ! Germany has negative rates and failing banks, seems speculation is being encouraged, almost fearfully - spend you money or lose it !

Thoretically, an investor taking interest rate risk should be compensated for it with added compensation for credit risk.

This is the new thinking, as told to me by a financial expert :
'Sure, if disinflation is built in, the returned principal in real terms will carry interest'

Wonder whether this will become a reality soon, and for the Banks too ?
We are going into dangerous times, for sure.

Sounds nice in theoretical terms to convince passive traders to remain so - negative yielding (real or otherwise) bonds above par, accept par at redemption and be grateful.

But in reality, geared speculative bond traders are yield seeking via capital gains above the purchase price over short time horizons while interest rates collapse due to disinflation caused by restricted bank lending -graphic example

Disclaimer - this type of activity should only be undertaken with other people's money (i.e.repo) - hence pristine sovereign collateral is in demand to execute this type of "investor" activity.

Looking forward to interest free loans from banks soon.

Banks don't need savers/depositors. They can borrow/attract funds from the international market which is awash with money created by QE in US and Europe. That ocean of surplus money is looking for safe investment with decent return. NZ is seen to be such a place. Our financial experts have bought into this and are making policies to benefit these outsiders, at the cost to NZ economy. The rest is just hogwash to fool the public here.

A more charitable interpretation would be that, in the environment you describe, and with an open capital account, the only tool they have to prevent appreciation of NZD is to cut the OCR.

Orr has clearly stated that the intention is to spur spending and has exhorted people to 'not save, but spend'.
The NZD may not fall much, because of reduction in OCR. Only petrol and other imports will cost more, meaning more spending. Exporters like Fonterra may benefit, but then that is like a subsidy given to them by Orr.

If mortgage rates go down 0.5%, how much % more money are banks willing to lend to someone on the same fixed income (if any)?

Will need to change its name when these rates arrive on our shores?

Not too memtion that this would be a cunning way for the spruikers to get savers to swallow their losses instead of taking the medecine themselves.