Former RBNZ Chairman Arthur Grimes warns of 'real danger' of the RBNZ destablising asset prices, as its employment target sees it go too far lowering interest rates

Former RBNZ Chairman Arthur Grimes warns of 'real danger' of the RBNZ destablising asset prices, as its employment target sees it go too far lowering interest rates
Arthur Grimes. Photo from Victoria University.

A former Reserve Bank (RBNZ) Chairman, Chief Economist and architect of inflation-targeting, Arthur Grimes, is scathing of how far the country’s central bank is going in its easing of monetary policy.

The RBNZ has been slashing already-low interest rates to try to boost inflation and employment in line with its mandate.

Nonetheless, consumer inflation remains stubbornly low, while asset price inflation is taking off. People are using cheap debt to pile into the property market, chasing yield there, as well as in the share market.

“It’s a real danger that the Reserve Bank is just destabilising asset prices, which is going to come home and really hurt the economy down the track,” Grimes - a Senior Fellow at Motu Research and Professor in the Chair of Wellbeing and Public Policy at Victoria University, told interest.co.nz.

Employment target to blame

He maintained the issue stemmed from a 2018 law change requiring the RBNZ’s Monetary Policy Committee to target “maximum sustainable employment” as well as inflation.

Grimes, who vocalised his opposition to the change at the time, said we’re now seeing the consequences of that “huge mistake”.

Had the RBNZ not been compelled to try to keep people employed, Grimes believed it might not have gone all out, slashing the Official Cash Rate (OCR) to 0.25%, and launching a $100 billion quantitative easing (QE) programme.

Nonetheless, he said the bank, which has taken a “least regrets” approach, should've been “much more circumspect”.

He couldn’t pinpoint when it shouldn’t have cut the OCR or how much smaller it could’ve made its QE programme while still providing enough liquidity in the bond market.

But looking ahead, Grimes said: “There’s absolutely no case for going to negative interest rates. It will make things worse. Because the thing that does impact on the real economy is uncertainty [which negative rates would create].”

He urged the RBNZ: “Just don’t do any further harm.”

Fiscal policy the solution

Grimes said it was “standard knowledge” in economics that you use fiscal policy (government) to address employment and monetary policy (central bank) to provide price stability.  

He maintained the RBNZ should "absolutely" continue targeting inflation, despite its efforts to boost inflation over the past decade largely seeing it remain below the 2% target mid-point. He said inflation was still within the target range and a higher level could be achieved over a longer term.

But Grimes said using monetary policy to prop up employment had “virtually no effect”.

In other words, even lower interest rates aren’t going to encourage businesses to borrow more to invest and employ more people when they’re nervous about the state of the economy.

The RBNZ has been of the view higher house prices make people feel wealthier, prompting them to spend more and stimulate the economy, at which point businesses are better placed to borrow, invest and hire people.

The RBNZ has also been clear it’s focussed on the immediate issue of increasing employment.

It only has to worry about house price growth if this affects financial stability. In other words, if banks become too reckless with their lending to the extent this puts their balance sheets on shaky ground.

Tax not LVRs

The RBNZ has warned banks it could reimpose high loan-to-value ratio (LVR) restrictions on lending against residential property, should they get carried away.

Grimes said the RBNZ wouldn’t have to consider this had it not loosened monetary policy so much to begin with.

“Two wrongs don’t make a right,” he said, pointing out that LVRs on lending to owner-occupiers at least would make it harder for people to put a deposit together, further increasing inequality.

“I’d really like to see the Government do something on tax,” Grimes said.

“They can do that now if they wanted to use their political capital. Let’s see if they’ve got any guts on that one.”

Grimes didn’t comment on which kinds of tax changes he wanted to see. He said it wasn’t just about introducing a new tax, but about looking at the system more broadly; something he maintained the Tax Working Group’s narrow remit (which said it couldn’t touch the family home) prevented it from doing.

Question mark over how to get asset price inflation on the agenda

Grimes said the RBNZ had to pay “far more” attention to how lower interest rates were “destabilising asset prices” in a “potentially unstable way”.

Yet he wasn’t sure exactly how it should be made to do so by law.

The Reserve Bank Act stipulates one of the Monetary Policy Committee’s objectives is “achieving and maintaining stability in the general level of prices over the medium term”.

It’s then the Committee’s remit, issued by the Finance Minister under the Act, that specifies the objective is to keep annual inflation between 1% and 3% over the medium term, with Statistics New Zealand’s Consumer Price Index (CPI) being the designated measure.

When Grimes helped draft the Act (which has since been updated) in 1989, he said the phrase “general level of prices” was deliberately used to include asset price inflation as well as consumer price inflation, should this be necessary.

Grimes said a line could be added to the Monetary Policy Committee’s remit, requiring it to target CPI without causing too much asset price instability.

Keeping a lid on asset price inflation could also be written into the RBNZ’s financial stability mandate.

Asked whether assets should be added to the basket of goods used to calculate CPI, Grimes noted asset prices were typically more volatile than consumer prices, so they’d need to be given a relatively small weighting.  

While CPI - a consumption index - doesn’t include the likes of land, shares and bonds, where value is stored, it does include the price of new housing. Statistics New Zealand, in its recently completed three-yearly review of the items in the CPI, increased the weighting of new house purchases from 5.50% to 8.65%.

Zero will from Labour

Grimes concluded: “When you have a government worried about inequality and you’ve got the Reserve Bank just pushing greater inequality, it’s really sad.”

However the Labour Party is disinterested in looking at how the RBNZ’s mandate and actions have contributed to house price inflation.

When interest.co.nz raised the matter with Finance Minister Grant Robertson in June, he said the impacts of quantitative easing on asset prices were “still to be told”.

“I’m not yet seeing anything that indicates to me that that’s a major concern, but obviously we keep our eye on it,” he said.

Put to him that it was too soon to see these impacts come through, Robertson said: “We’re very much aware of the potential for it and obviously after other crises in the global economy we’ve seen those kinds of effects…

“For now, the financial system’s stable. Banks are lending in line with their policies and in line with the expectations the RBNZ has on them.”

Robertson has largely stuck to this last line since June, campaigning on providing stability and continuity. 

ACT Leader David Seymour suggested asset price inflation should be added to the Monetary Policy Committee’s remit. Yet Seymour only made the suggestion when prompted by interest.co.nz a day before the election.  

The Opportunities Party was well-aware of the side-effects of QE. It campaigned on the RBNZ injecting its printed money straight into the economy via cash payments, rather than through the banking system.

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72 Comments

15
up

If you really want inflation, UBI is the way to go! They know it, they just won't do it.

It is to some extend, but what you did not realize how clever the housing cost being taken out from the inflation reporting, and yet? even if the UBI is here, it can be tweaked to always below the rates of the housing inflation, after all it's all servicing consumer regular spendings (CPI), .. so yes, we can have 90% of our disposal income goes towards the rents/paying off mortgage for example.. doesn't matter it's not being reported as inflationary by CPI current definitions, thus.. can be in Lower figure, which makes the RBNZ have the reason to furthering interest down again.. to stimulate inflation up clever eh? - and all the time, the supposed massive inflation is to be lift up within mandate of 1-3%, yet silently the servicing of those housing already sucked up all the RBNZ economic measures, but hey.. now you're understand slowly when the economy in NZ=F.I.R.E economic only, means that's about it that need to be supported.

22
up

Pathetic abject submission to "feel good" wealth effect bullshit.
Simple solution would be to control leverage by those borrowing multiples against existing houses either their own or those they rent out.
Inequality labour concern - well they seem to have no clue or interest in doing anything about wealth inequality do they? Labour governments are always a disappointment on this score and this one will be no different.
A Labour Party should be actively involved in shifting economic power away from top 25%. If not, they are just National with good intents and hugs

Inequality labour concern - well they seem to have no clue or interest in doing anything about wealth inequality do they?

Because it's chardonnay socialism. Always has been since the Clark era. Real socialist agendas usually mean that someone takes a hit higher up the economic food chain (think Uruguay and Jose Mujica if you want to see a real approach). In NZ, govts try to execute socialism under a neo-liberal economic framework. Bollocks really.

11
up

Whilst letting a natural correction occur would be my most preferred approach (i.e. no more $12 bottles of Antipodes water with a meal), helicopter money would at least be a fairer way of trying to address the current situation than relying on the 'wealth effect'. Pumping up asset prices to help the economy is incredibly unfair on those without assets...

"wealth effect b*llsh*t"
Using that strong language tells me you're losing the game and you knwo it. BTW limiting finance to investors does little as many are low LVR or have their own funds

having a shred of social conscience = losing the game

I didn't say that I am in favour of housing inflation but what's your answer to the problem. I'm saying I don't think his 'easy' solution will have any effect.

pretty easy to "lose the game" when the ref, the groundsman, and even the rulebook writer is in the other team's pocket.

12
up

Tops UBI could be temporarily increased from RB printing during pandemics, war, depressions to stimulate the economy and decrease debt levels without pumping asset prices.

https://www.top.org.nz/universal_basic_income

Your handle is fitting .. surely repeating the same nonsense ad nauseum will eventually produce a different result.
Please vote TOP again in 3 years time.

14
up

“warns of 'real danger' of the RBNZ destablising asset prices“
Imagine the different conversations we could be having now, if we had voted for fundamental change and not full steam towards the giant pile of sh*t our economy will become.

29
up

Got to love Orr's classic doozy "higher house prices make people feel wealthier, prompting them to spend more and stimulate the economy"

We've heard this tune (and variations of it - E.g. 2000 - 2008 Labour's "Higher house prices make people feel wealthier and helps them ignore Cullen helping himself to 39 cents in the dollar for income over $60K) to the detriment of our capital markets and investment products for decades now. It's time for broad spectrum planning, taxation and any other reform needed to right the ship, before an external force does it for us.

21
up

Mr Orr should ask those spending a high percentage of their income in paying off the massive mortgages they had to get into to buy a home.

10
up

Problem is though Orr's right, people are spending based on feeling wealthy. However it's not creating employment and is exacerbating a huge divide.

I think chance of negative interest rates next year are pretty low now with the growing chorus against.

We have the solution to Africa's poverty. Borrow more. Spend more. Stimulate the economy. Simple really.

They did that already borrowing from Europe, China and the US - but are unfairly charged a higher interest rate than the richer countries can lend at...
They are being screwed

12
up

The status quo will protect their precious bubble with everything they’ve got but in the end it won’t be enough...

The counterbalance should be deposits. Ideally when interest rates drop too low then people abandon term deposits and the bank cannot fund lending, therefore interest rates must rise to attract deposits to fund more lending. This would require some percentage of lending to be funded by deposits (maybe it is, i'm no expert), but balance seems to have shifted full force away from this to the RBNZ creating money at artificially low rates in no way connected to risk or the natural rate of interest (the value of consuming now rather than in the future).

Yep, who needs deposits when you have FLP?

From how I understand it, FLP is going to creating an artificial environment, allowed for by printing money, and devaluing savers money. Where as if banks had to actually attract deposits in order to lend that money out, then they wouldn't be able to, if they are only paying less than 1% on TD's. It will be even worse with negative rates. Who in there right mind would pay a % to keep their money in the bank, allowing banks to then lend that money out. We would have to have deflation for people to do that, but real world inflation including house prices and labour around the building sector is high in NZ.

13
up

What's the point of adding asset price inflation after the prices have already been inflated. That would just lock them in at stupid high levels.

That employment law change was one of the fish and chip lady's brain farts.

Thought I was they only one who referred to her as the fish and chip lady.

I still find it utterly bizarre that so many of her voters can't seem to connect the effect of the RB and house prices yet keep supporting her and her mad cronies.

11
up

Some of us are quite aware, thank you.
It's just that what Labour are allowing through indifference, National would be actively encouraging.

Indifference, a good description, thanks.

25
up

I'm not sure about the whole inflation targeting premise. The idea was that businesses need stable prices in order to provide a stable environment that allowed for investment in new capacity and productivity improvement.

It seemed such a good idea at the time. Yet, we got suppressed wage inflation via immigration. We got suppressed interest rates via monetary largesse. We got stupid house prices. We got shopping malls in abundance. We got excess capital inflow (= a current account deficit). We got an over priced currency which destroyed our industrial base and suppressed export profitability.

All in all we got ourselves in a right mess, which we disguised by the false wealth illusion that is housing.

What does Arthur think we should have done differently? All in all, it has not been as successful as was hoped. Would targeting something else, such as a modest surplus in the current account, be any better? Or would just targeting 0% inflation on average do the trick?

Good comment, Roger.
We need to do more to ensure foreign capital owners put their money to work here instead of chasing easy gains from brownfield investments (existing houses, listed securities, profitable companies, etc.), and moving these gains out of the country into offshore tax havens.

Tax reforms and giving sharper teeth to competition regulators should gradually improve our investment landscape.

The over priced currency was primarily because of those large countries which went early on money printing/ currency manipulation. China being the main one.

Targeting credit growth that is in line with GDP growth?

19
up

Immigration is a plank in this problem. You bring in 500k people in a decade, build not enough houses and wonder why people are double bunking

14
up

Well, well, well

The "wellbeing" program is off to a flying start

15
up

Labour has got itself one heck of a mess with no turning back
The only solution now is to undo everything they have done and start again
This biggest mistake will be to try and "patch things up"

17
up

"This biggest mistake will be to try and patch things up"

Which is of course exactly what they will attempt to do, badly, I'm sure. Zero vision from either of the major parties.

Sounds like they're gonna need a few more bureaucratic jobs in Welly for that

20
up

Orr must be dismissed immediately.
The large majority of the Country can clearly see that the current monetary policies of the RBNZ are potentially destructive and highly damaging to the very financial stability of the whole nation.
He (together with a minority of self-serving housing speculators) appears to be the only one who does not understand how his policies are short-sighted, reckless and ultimately counterproductive.
He must be dismissed urgently before he causes any further damage.
RBNZ's independence or not, the Government must take immediate action to remove this out-of-control governor from his post; he is clearly not fit for his job, as also confirmed by his pig-headed stubbornness and his incapability to listen to the voice of reason now becoming more and more vocal and coming from many different venues. If the Government does not act with urgency in removing him, they are complicit in wrecking the economy with the folly of this absurd monetary policy.
Mr Orr, just listen to Artur and to many, many others: “Just don’t do any further harm.”

Orr must be dismissed immediately.

Leave him there as the damage has been done. I think NZ should double down on the housing bubble and go for broke, just to see what happens. That might sound reckless but the monetary system is broken anyway (why the central banks are adopting CBDCs). So letting the public trigger hurry up the economic meltdown could provide a useful case study.

Says professor J.C. But so does not, the general public and new house buyers in particular.

Says professor J.C. But so does not, the general public and new house buyers in particular.

So you think removing Adrian Orr will miraculously make things better in NZ? Or are you trying to suggest that the 'muddle through' approach is all we have.

I can't think of what they could do to meaningfully juice the market any more. 1.99% interest + no LVRs is pretty close to the wind. Maybe 1.5%/1.25% and no LVRs. As long as paying the bank rent is cheaper than paying a landlord rent, yep they could keep juicing it. Might run out of buyers though. Trying to think like a numbers psychopath here. Or cost of living goes way up, wages must go up to match, currency devalues, interest rates rise, everything explodes. Or, everything plateaus for another 10/20 years until the next generation grow up thinking 0%OCR is normal. Or BIS step in with regional currency for US,UK,Canada,AUS,NZ called the 5 eyes dollar. Merchant banks are out, BIS does the lending directly, and we get another generation of slavery. I dunno who cares, sport is back, beer still cheap

There's more they could do.
-Guarantee banks against making losses on defaulted mortgages by promising to buy them back if they're at risk. Basically remove the last remaining shreds of lending risk for banks. I can see it happening.
-Accommodation supplement for FHBs.
-Increase immigration.
-Aussie-style FHB freebie.
-Make mortgage payments tax-deductible against against PAYE.
There's all kinds of junk they can try, and probably will.

11
up

Happy realization.

Now suddenly everyone has realized the damage done by RBNZ to Asset class specially Housing Market but still Egoistic Mr Orr will look away to prove otherwise. Instead of now taking action asap just as they took action when had a feeling that house price may fall.

Labour government less said the better.

11
up

Quick to act when financial stability was threatened via negative house price outlook back in Feb/Mar 2020 yet so reluctant to act when financial stability is threatened via overpriced housing. Just sad.

RBNZ could slam the OCR up to 4% for a month or so - that would kill this dead in its tracks PDQ. Bit late fir LVRs

From 10 Nov 2010
One thing RBNZ and Bollard could do is frequently and capriciously jerk the OCR around every couple of days. There is nothing set in concrete that says the OCR can only be changed periodically. It could be used as a very powerful weapon. It could scare the cowboys away and create a sense of instability. https://www.interest.co.nz/opinion/65293/tuesdays-top-10-why-aucklands-h...

Heh. That's what David P Goldman referred to as the 'Continental Op' approach.

Plans are all right sometimes … And sometimes just stirring things up is all right – if you’re tough enough to survive, and keep your eyes open so you’ll see what you want when it comes to the top.

Don't try to be all negative here folks, RBNZ should provide more stimulus as per current reported lower inflationary figure. They simply just MUST DO IT. Any NZ govt the past 25-30years, clearly have less inclination to do any prudent measures in their 'just governance' let alone doing any drastic measure. This recent Pandemic eventuality, presented a brilliant opportunity. The RBNZ clearly sees it. We recommend that Mr.Orr & team to steadfast here, increase November FLP figures to 200billions, the Q1 2021 QE/LSAP should be increased to 500 billions, whilst at the same time put the OCR into -25% and ensuring that LVR never to see the light of day again, DTI is a clear no go zone for NZ economic recovery. There's No real danger here Mr.Orr, those that uttering it, usually already heavily have vested interest on the 'current de-facto trajectory' to maintain the same old business practices. Most of the local Banks already clever enough to show their 'strict lending criteria' - So to those FHBs & Investors, sorted out your finance now & quickly, ensuring that you have job security (tidy up the renaming of 'subsidy' into something else if you can). Home carry intrinsic value, long term, security, peace of mind, raising family, you won't regret it - Banks? will not be reckless on providing you with the loan it will be a diligent & thorough process. Remember, mid of next year/2021? - with the positive news on the vaccine front & highly possible of border opening? - you will reap the benefit of current prudent decision, you blink it until first quater of 2021? - then you'll lost this golden opportunity. Remember this for sure, the bigger we are all in here with the scheme of being kind to each other when buying and selling up/down RE - the more likelihood, of we are all being bail out by the govt. should something untoward happens, after all that what it means of being NZ as sovereign nationhood, we can print as many $ needed, when it's needed.

I liked this stream of consciousness.

Yes, I like your thinking. If we all have max debt. Then we can't pay it back...what can they do...shoot us all, put us in gas chambers?
They truely have completely destroyed the monetary system.

Inflation-targeting architect urges RBNZ: 'Just don’t do any further harm'

So he too is implying that RBNZ is harming the economy - hence his words - Do No Further Harm.

Mr Orr is took big for his boot and his ego will stop him from taking corrective measure for, if he does take those corrective measures like introducing LVR atleast to investors asap, will reconfirm (his guilt, if have.....) that he has gone overboard and errerd in his decession and action, so his ego which is inflated like housing market will make him folow the path of destruction (fundamentals and asset prices).

Instead if he acts soon, may justify that is pro active in either direction to act and not just to pump up the ponzi.

.

$9 million home and $350 worth of Debts? Sounds about right...It's called Leverage.

The residence of international fugitive Michael Menghong Gu hit the market on Wednesday for $9 million, marking the start of one of this year’s most anticipated sales campaigns.
Gu fled Australia in late July just weeks after his property empire iProsperity collapsed with debts amounting to as much as $350 million.

https://www.afr.com/property/residential/sydney-home-of-international-fu...

As long as we have laissez faire capital movement Orr has little choice...a (temporary) rush of FOMO in the housing market is the lesser evil.

What's The Bigger Evil then?
A Fixed Currency + Trade & Capital Flow Controls?
As I've noted, half the World has those, including some of the biggest economies on the planet.

capital flight and a worthless currency at one end and a grossly overvalued currency and the death of the export sector at the other

There's an irony in discussing risk: since we all have an instinctive reaction to visible risk, we think we understand it. But alas, we don't, especially when the risk is invisible or Systemic....Systemic risk is difficult to isolate and analyze, so we're literally blind to it. It's not that we're blithely ignoring risk, we simply do not see it.... the natural assumption that the recent past is a reliable guide to the future....Central banks and governments have gone to extreme lengths to maintain the illusion of control...the risks of systemic collapse are much higher than commonly anticipated. Recency bias, belief in the illusion of linearity and the powers of authorities, failure to properly compound risk variables and feedback, uncritical acceptance of limited data, any one of these is the equivalent to risk blindness

(CH Smith)

Wow a tiny 2 bedroom in farm cove went for early 900s which in May would have fetched early to mid 700s.

Well FHB can afford with low interest rate BUT with 20% to 30% more debt and Mr Orr and Jacinta Arden our PM feels that all is helping FHB, not realizing that it is FOMO created by them that making FHB panic and rushing to borrow more and more and buying any pigeon hole possible.

I guess ultimately it'll just mean we destroy pensioners' savings.

ACT Leader David Seymour suggested asset price inflation should be added
that would be interesting , if they did that we would have the highest interest rates in the world

Yes an interesting idea. It would certainly be better than the current approach however monetary reform is the only answer now. But it’s not really discussed anymore these days. Maybe this house of cards needs to come crashing down first before we can talk about fundamental change to the money system.

The genius of the intellectual giants
They really believed the wealth effect from rising house prices would be the salvation
Bascand flapped his jawbone and told the peons to issue forth and spend
Orr told savers and the elderly their income from retirement accounts goes to zero
Orr flapped his jawbone and told savers and elderly to go forth and spend their capital instead
So commanded the high priests of the church of the squiggly line
And so the masses obeyed

You should phrase all your comments like this to match your username :-)

What? something like this

missionaries and fanatics
In the deep south a revivalist meeting is in progress. A charismatic evangelist fires up the congregation with fire and brimstone. Many see the "light" and become immediate devotees. In a state of heightened fervour, the congregation contribute generously as the collection plate is passed around.

chartists and fanatics
In the far north, a charting seminar is in progress. A charismatic presenter fires up the congregation with promises of untold wealth and riches. Novices learn charting is the light and the way. Convinced they have found salvation and the holy grail. In a state of heightened expectation the congregation contribute generously. Signing on for the never-ending journey to "el-dorado" and "valhalla"

When you have rural banking managers advising dairy farmers "you're better off buying 4 rental properties rather than the runoff next door" the country has a major problem.
And its happening.

Who is going to be renting all these houses that people are buying to rent out? There seems to be a glut already of rentals. They also need to be getting pretty good amounts each week for it to be worth it.

Otherwise they will turn into Ghost houses. We need a Ghost house tax, but we can't get this in the next 3 years due to Labour not allowing any new taxes.

NZ already appears to have enough houses in NZ. the problem is over 100000 of them are apparently sitting empty.

Each time a house is purchased as an investment by an investors, that is potentially another house that is taken out of the NZ housing stock. Many are being used as BNBs too.

No need to rent them out with interest rates this low

That is the problem, Ghost houses. It then creates a demand for new houses to be built. Taxing people who leave their houses empty for longer than a certain period of time without a good reason (eg it not being fit to rent out or live in), IMO is the only solution

With an 11 - 12% average capital gain in 6 months and in some places 40% in the last 12 months, nobody cares who is going to be renting them.
And that is the problem.
I wasn't joking you know. Rural managers are advising farmers to do it.

Perhaps they want 4 new houses as security rather than a runoff block?

I was at a meeting with three bankers recently, and I asked them how much purchasing power did they think the low deposit rates had taken out of the economy. One came back with the comment that it had been replaced with people borrowing to consume.

One problem. Eventually you hit a ceiling where you can no longer borrow. And what happens then?

In 20 years, people will look back and ask, what we’re these brilliant idiots at the central banks of the world thinking.

"One problem. Eventually you hit a ceiling where you can no longer borrow." Apparently not, the goalposts are just shifted to allow even more borrowing to take place.

Yes, it is scary. Negative interest rates, Money printing, and now Funding for lending programs. They seem to be in a big hole they can't get out of. Covid will get the blame, but it was problem well before then.

Until the posts are out of the ground. Game over.