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Inflation targeting architect Arthur Grimes says RBNZ should target lower inflation and house prices, as the status quo has caused a 'wellbeing disaster'

Inflation targeting architect Arthur Grimes says RBNZ should target lower inflation and house prices, as the status quo has caused a 'wellbeing disaster'
Image sourced from Pixabay

Arthur Grimes is accusing the Government and Reserve Bank (RBNZ) of using the inflation targeting approach towards monetary policy he designed in the late-1980s to engineer a “wellbeing disaster”.

The former RBNZ Chairman and Chief Economist, who now heads up Wellbeing and Public Policy at Victoria University and is a Senior Fellow at Motu Economic and Public Policy Research, laments the explosion in house prices that has accompanied the RBNZ's slashing of interest rates.

“This is the worst wellbeing disaster we’ve probably had in the last two decades,” he told

“I can’t imagine a worse wellbeing outcome that’s been engineered than keeping young people and poorer people out of the housing market.”

Grimes: 2% inflation is too high

Grimes has for some time believed the RBNZ overcooked its response to COVID-19 by loosening monetary policy too much. 

He partly attributes this to the RBNZ being required to target annual consumer inflation of between 1% and 3%. Pre-1996, the target was between 0% and 2%.

“You basically have a central bank that’s actively been pushing up the cost of living. It just seems extraordinarily detrimental to wellbeing,” he said.

"If you have a wellbeing government, why would it be trying to push up the cost of living for people?...

"Prices are still going up when inflation is at 1%."

The Consumer Price Index (CPI) hit a 10-year high of 3.3% in the year to June. Meanwhile, the median house price rose 28%, according to the Real Estate Institute of New Zealand.  

Grimes: Ditch the employment target, introduce a house price target

Grimes believed the RBNZ could be made to target house price inflation in addition to consumer price inflation when setting monetary policy. 

He commended the Government for recently requiring the RBNZ to “assess” the impact its monetary policy has on house prices, but maintained it could go further. 

Grimes also reiterated his opposition to the Labour-led Government in 2018 requiring the RBNZ to target “maximum sustainable employment” as well as inflation.

He is adamant this requirement prompted the RBNZ to do more to lower interest rates than it should have.

Grimes said the Treasury was “utterly incompetent” when it advised the Government on making the change.

“Now we’re seeing the result of that,” he said.

“It’s just terrible what’s been done to the generation that’s left school and getting into the workforce.”

ECB to target house prices

Grimes’ comments come as the RBNZ is the first among its peers to start reducing it monetary easing and looking to an Official Cash Rate (OCR) hike.

His comments also follow the European Central Bank (ECB) announcing it’s working with Eurostat to create an owner-occupier house price index.

The plan is to incorporate this in its measure of consumer inflation at a yet-to-be-determined date after 2026.

Stats NZ considering creating a house price index

Statistics New Zealand is considering creating an “official” house price index.

Given this is still a “maybe”, there are no plans to incorporate it in the CPI.

Rent and the cost of building a new house are included in the CPI, but the costs of buying land or an existing house are excluded.

Furthermore, there are no plans to revise the weightings of goods and services in the CPI outside of the three-yearly review next due to be done in 2023.

Housing costs were given more weight following the 2020 CPI review, but Grimes maintained rental costs remain undervalued.

Housing and household utilities expenditure weights in the CPI (%)
Subgroup 2014 2017 2020
Actual rentals for housing 9.22 9.20 10.26
Home ownership 4.20 5.50 8.65
Property maintenance  3.09 2.14 2.27
Property rates and related services 3.18 3.54 3.23
Household energy 4.54 4.14 3.60
Total 24.23 24.52 28.01

It's also worth noting, the weight given to ‘housing and household utilities’ in the CPI is considerably greater than the weight given to ‘housing, electricity, and gas’ in the European Harmonised Index of Consumer Prices (HICP) at 28.0% versus 17.7%.

Grimes opposed trying to incorporate the cost of existing houses in the CPI, arguing houses are assets, not consumable goods or services.

He said the Reserve Bank Act 1989 specifically included the phrase, “general level of prices”, to not limit the monetary policy target to the CPI.

Hence, he saw merit in the RBNZ giving say 10% consideration to a house price index and 90% consideration to the CPI when setting monetary policy.

McDermott and Reddell oppose targeting house prices

John McDermott - Motu Executive Director and former RBNZ Assistant Governor and Chief Economist - isn't convinced there's a strong enough relationship between interest rates and asset prices for the RBNZ to target the latter.

“Asset prices move by people’s perception about what the future value will be,” he explained.

“Monetary policy is going to have an influence, but it’s not going to be that predictable.

“Can central banks move house prices? Possibly, but it’s difficult… Should they, with monetary policy? That’s really not settled.”

Michael Reddell, who used to hold a number of senior positions at the RBNZ and now writes a blog, didn’t like Grimes’ idea.

He feared a rise in house prices could trigger OCR hikes at a time the economy was otherwise not performing well and there was high unemployment.

“A 20% rise in house prices would then be akin to a 2% rise in CPI inflation, which would require really big OCR increases, exacerbating exchange rate and unemployment imbalances,” Reddell said.

“We have problematic house price inflation mostly because of land use restrictions and they need to be tackled at source…

“Of course, the monetary policy target need not be the CPI, but even then, there is no obvious trigger to prompt a relook at the target before [RBNZ Governor] Adrian Orr’s term expires in March 2023.”

Reddell: ECB no trendsetter

As for the ECB’s idea of incorporating a house price index in the consumer price index, neither Reddell nor McDermott saw any problems with the CPI.

While McDermott spoke very highly of the “methodical” way it is reviewed and constructed, he said it is worth New Zealand paying attention to what the ECB is doing.

But he cautioned: “I think a lot of hard work needs to be done before you make changes."

McDermott noted central banks around the world talk frequently via various forums and conferences.

However, Reddell didn’t believe the RBNZ would follow the ECB or get Statistics New Zealand to change its measure of CPI.  

He said the review the ECB is doing sees it “converge towards the central banking mainstream” rather than be "some sort of trendsetter”.

McDermott: House price inflation was predictable

McDermott maintained we should be careful what we wish for, saying the monetary and fiscal policy deployed in response to COVID-19 did a “fantastic job” protecting the labour market.

“You probably wouldn’t have done anything else,” he said.

“But the net consequence is, you’ve pumped huge amounts of liquidity into the financial system. It has to find a home, and it’s found it in asset markets. In New Zealand, the biggest asset market is housing, and that’s where it’s gone.

“Was it predictable? Of course, it was predictable. Would you have done anything else? Probably not. But now we have to think - how do we manage that problem?”

For those interested in a more fulsome explanation of the treatment of housing in the CPI, here's an explanation from Stats NZ:

The CPI does measure inflation for the purchase of new housing. Stats NZ surveys the price of buying a newly built house, excluding the land the house is built on, from builders that build standard-plan houses. Land is excluded as it is considered to be the investment component of new housing, and investments are considered out of scope of the CPI. The other component, the house itself, is considered a source of shelter.

Stats NZ does not track changes in the price of existing (second-hand) houses. This is because expenditure on existing dwellings has no overall impact on the stock of owner-occupied housing: each sale of an existing dwelling (negative expenditure) is cancelled out by a corresponding purchase of that dwelling (positive expenditure). Spending on newly built houses represents a net addition to the stock of owner-occupied housing, and is therefore included, as are alterations and additions to existing owner-occupied houses.

Other types of expenditure associated with home ownership are also included within the scope of the CPI. These include local authority rates, property maintenance, dwelling insurance, conveyancing legal fees and real estate fees.

This acquisition approach is recommended by the International Labour Organization, where the main purpose of the CPI is to measure inflation, as is the case with the New Zealand CPI.

More information about housing in the CPI can be found here and here. Stats NZ intend to update these articles in the new year, however the conceptual approach for purchase of new housing described in these articles is still relevant.

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Doesn't take a PhD in economics to predict that pouring hundreds of billions in a matter of months exceedingly on the consumption side (government expenditure and consumer/housing lending) of an economy already overdependent on stretched global supply chains for everything from materials to skills would lead to further income inequality, runaway asset prices and higher living costs - the perfect for a wellbeing disaster.


Throwback to 2020... 


Jenee you are a gem.

Please show this video to Robertson and Jacinda or hope that someone bring it to their notice though are thick skin politicians but will still like to hear their comment after watching the video clip.

In fact this clip / short video should be run in public domain on a regular basis to shame the culprits.


Please show this video to Robertson and Jacinda

Robbo's responses are just dogmatic emptiness and Jacinda just goes on the defensive with excuses that have no significance on properly addressing the issues. Both are out of their depth.

alittle - yes; one of the culprits is the media not pulling Roberson up on "sustainable economic growth".

It's an oxymoron.


Princess refuses to answer (or even acknowledge) Jenée's questions about changing policy settings due to the RBNZ response. All she did was blah blah about the amount of money that is being BORROWED by the government. Would be better if she thought about it for a minute and realised the government should have changes RBNZ settings or policy settings to capture the printed money for government redistribution, instead of borrowing money for redistribution at the same time RBNZ printed money to put into the pockets of asset holders. Pretty poor and clearly she doesn't grasp the simple premise.

Again, the right response was to take the money printed by the RBNZ and give it out in cash payments to everyone.


Careful with that video. Princess is making incitement of hate a crime.

It is no joke. The new hate speech laws will be directed against those who oppose Labour and the Greens.


A couple of quotes from Robbo that stuck with me:
"I wouldn't say I'm worried..."
"We clearly keep an eye on asset prices..."


A couple of quotes from Robbo that stuck with me:

Yes. It's like he's a member of a theater group. Playing the role of a govt minister. Trying to sound like a minister, but not actually being that minister in any real sense of what it entails off the stage. That might sound harsh, and unfortunately, I don't think he's the only one in the pantomime.

A couple of quotes from Robbo that stuck with me:

Yes. It's like he's a member of a theater group. Playing the role of a govt minister. Trying to sound like a minister, but not actually being that minister in any real sense of what it entails off the stage. That mind sound harsh. Unfortunately, I don't think he's the only one in the pantomime.


Everybody is in the pantomime.

The whole western world - heck the whole world - based its premise on GROWTH. They are unsure as to what? But Growth is it. And they chose to measure it in something which had to be progressively-removed from real backing; money. Which is keystroke-issued debt.

Grimes, Reddell, Orr, Robertson, Bollard; they're all flying blind, because of the above. We are running over the top of the growth gaussian now, staring down the other side. With never-more betting-slips in our hands. Everyone is trying to out-fox everyone else, re maintaining their 'wealth'- but within a bounded and dwindling sphere of operations. Thus housing - and other perceived stores of wealth - over-investment.

It was a societal misunderstanding - although those in charge (governments, central banking, treasury, and academia) must shoulder the blame for not initiating a narrative based on the truth (about the Limits to Growth; our position thereupon).

Blaming each other is missing the point.

I fear you are on a losing mission.....nobody wishes to adapt to a shared 'less is more' response, it will be the age old fight over that which remains for as long as possible (and preferably get someone else to do your fighting for you)

But who could have possibly guessed that 'the economy' would in fact be bound by physical constraints within a closed system?!? No one could have seen this coming...

Good points, but I don't think we're close to the Malthusian trap yet, perhaps when we're Kardashev Type 2, but we'll all be suspended bio chips slurping vitamin gel packs locked in VR by then.


Proof Robertson hasn't a clue and can't envisage the consequences of his and RBNZ actions.

They've handed out cash like confetti and are now trying to contain the damage.

Likewise RBNZ with ridiculous interest rates and talk of negative ones, drove investors to safer property investments with better returns than banks.

Typically we had higher OCRs here than most other countries yet we cut further here to similar global levels which compounded the damage further.

I think Winston Peters is speaking the words here that Labour and National are actually thinking : "Gee gosh you dont want asset prices to fall, do you? Ho ho ho what could possibly be bad about asset prices spiraling up and up?"


The lot of them represent exactly what is wrong with this country.

Great clip, Jenée. You have the patience of a saint. Why can't politicians just be straight without all this spin? Might get them more votes than they think.

Grimes: Ditch the employment target, introduce a house price target

Arthur Grimes hit the nail on the head. Too much focus on employment & lack of focus on house prices has led to a well-being disaster. Renters are the big losers as they have been totally ignored by the government.

The current government has created many law changes that will continue to drive up rents and reduce rental supply. More renters will be forced to find alternative accommodation. Emergency accommodation will soon reach its limits in many cities. This will lead to greater misery & a worsening well-being disaster.

And there is such an easy solution: universal rent price controls (a weekly rent maxima policy), set such that weekly rent at the lower end of the housing spectrum equates to no more than 30% of the average household income. You base the formula around rateable value (CV) and introduce a variable (x) based on the average household income (to get to the 30% maxima) in the district. And apply it universally, that is, to every rental property.

Weekly rent maxima = (CV/1000) +/- x%

I like your formula and think it would be fair and equitable, but do not like that we have a system that creates the problem to make this solution necessary.

Certainly agree with you there, Dale. And sadly, necessary as it is - we have created a double-edged sword by subsidising the cost of rental accommodation via the accommodation supplement. Hence, one has to design-in reductions to that supplement as well - meaning in some cases (many?) cases as AS goes down or is deleted altogether those people on average incomes (and above) don't see much benefit in their pocket, but they are at least paying for their own rent in full. People on incomes lower than the average will still need a supplement.


Re house prices: unless we have a monumental price crash we are going to loose a large percentage of our young Kiwis overseas when the world has sufficiently recovered from the pandemic. Who in their right mind would remain when they can receive far higher wages and purchase much cheaper houses. We have created a filter to ensure that we retain only young kiwis who are not in their right mind. Might explain a thing or two.
Maybe the solution to our mental health problem would be to give people an airline ticket to move to a country where they can live with hope of getting ahead?

Much of the mental health problem is with kids and across all wealth deciles. House prices aren't on their mind at all.


"House prices aren't on their mind at all"

When you say 'kids' - who are you referring to? Those I talk to in their 20's are stressed as hell about the price of houses, the size of the deposit they need, the size of the mortgage they will require to pay off over their working lives.

So probably the opposite of your statement.

When you say 'kids' - who are you referring to?

Under 18's.

Mate it must be all good in the ivory tower you live in.....

You consider over 18's to be kids?


Silliest comment of the day.


Many of the kids are being dragged up in unstable, deprived and totally unacceptable rental environments that are not conducive to raising happy, confident and productive adults.

I agree with your comment, however it is not just children being brought up in rental environments. In my view the mental health of young NZers can be largely attributed to NZ culture and attitude. Mostly when I meet someone new in Auckland (and I suspect it is the same elsewhere in NZ), the first questions I get asked are where do I live, is it my house, and what do I do for a job. Having lived for a number of years in the UK and the USA, I can say that I was very rarely ever asked these questions. No one cares. There is an underlying assumption that you ARE renting. The culture in NZ is very much about what you do and what you own. I think this is a key contributor to poor mental health as it creates an unusually high focus on these aspects of peoples lives.

And where are they going to move to for all these cheaper houses?

Houses prices are inflating overseas .


Really I find this to be implausible and Impossible - the labour government to global fanfare released a well-being budget just over 2 years ago - a world first promising that all kiwis would be better off moving forward. Surely they can’t already have broken what was a crucial promise. Mr Grimes must have surely misread the situation.


Arthur Grimes: RBNZ and the Govt have engineered a 'wellbeing disaster'

Agree but it is too late now. Either the rbnz and government was stupid or ignorant or both but reality is that have totaly screwed up and is hard to correct without facing some serious side effect, which both cannot even think off leave about taking action.

This may be not only restricted to NZ but impact will be worse in NZ being a small island with limited economy or can say just housing economy.

Jacinda Arden along with Orr has finished the social fabric of the country and only motivating factor is greed and brutal vested biased sbirt term interest above.....

One just have to walk and talk with anyone and only topic is housing speculation.


The housing economy has happened because of misplaced priorities. Just look at how much taxpayer money is spent on keeping the lights on, while productive sectors are burdened with more costs and uncertainty in the name of wellbeing and environmental reforms.

For example, the government recently showed its support for hi-value business with some funding for photonics and quantum tech over 7.5 years that equates to less than 10% of the one-off tourism recovery package or 29 days worth of MSD's emergency housing spend.


"House price inflation was predictable"? Really? Then how come last year RBNZ and economists were forecasting 10% drop on housing price which was completely inaccurate? Then RBNZ drop 75 basis points on OCR and a complete LVR removal based on the inaccurate forecast. Why can't they just admit they overdone it and made a huge mistake? Yes the low OCR protected the labour market but why did we have to take the LVR out? I thought housing price wasn't in RBNZ's mandate.


> Then how come last year RBNZ and economists were forecasting 10% drop on housing price which was completely inaccurate?

Because those predictions were based on the collective reckons of Treasury staff taken from around the watercooler rather than any actual economic modelling.


Will not like to see Orr retire with dignity. Happy to see him kick out as can than believe in Karma or it falls on Jacinda and remember karma is a bitch.


“Was it predictable? Of course, it was predictable. Would you have done anything else? Probably not. But now we have to think - how do we manage that problem?”

Wow, these guys are so out of touch. Surely they must regret how things have played out? The whole system needs an overhaul. Trying to solve every crisis by transferring wealth from current and future generations to asset owners and hoping for a trickle down is just daft. Do you need a spreadsheet to confirm that?


Hi Jeene, A though : Difference between dictator and democratically elected politicians ( can't address them as leader) and reserve bank governor is that dictators do not have to give justification for their action where as in democracy, they do what they want But only have to give excuse / justification of their action.

Another thought that with dictators, you can hang them or leave it to public to be floocked but in democracy cannot touch them till their term ends and even after in worst scenario, if they lose election, still make fortune to retire with plump posistion.

Currently we are ruled by dictators who don't care how badly they screw lower & middle class in name of growth & property price will see minimum 30% more increase in next 3 years till same policy makers are in control.

If current govt & governor genuinely can't handle the situation, in that case they should resign immediately, if they have little bit of humanity & shame left, already huge damage is done to our society by this lot of drumheads.


Well anyone can see the problem with the CPI when house prices take off because its such a small component in the total make up. What happens is only like 1/10th of the price increase gets factored in as its so diluted in the other figures. Basically house prices could have doubled in 12 months and we would be looking at only 4% inflation. The RBNZ did not care about dropping rates and runaway house prices because they already knew it would not affect the CPI to any great extent.


Stand exposed and still manage to hold their head high as their is no accountability.

May seem far fetched but will not be surprised if the inequality created by Orr and Jacinda gives rise to unrest in the society. Can only hope is not red.

Time to expose real face behind the smile / smirk.


A system is corrupt when it is strictly profit-driven, not driven to serve the best interests of its people.

Jacinda and Orr policies have tarnished the social fabric, now there is no way you can revert the damage. It is next to impossible in NZ.

For weak and poor households, very sad you don't have option, other than dealing with pain. But this govt will make sure that you will not die by providing enough support in form state housing and handouts.

For Kiwi kids it's very simple leave this country & enjoy your future in a land which will give you enough opportunities to grow. This place will destroy your future.


For weak and poor households, very sad you don't have option, other than dealing with pain. But this govt will make sure that you will not die by providing enough support in form state housing and handouts.

Essentially neo-feudalism but the handouts are there to make believe it's not.


“Asset prices move by people’s perception about what the future value will be,” he explained.
“Monetary policy is going to have an influence, but it’s not going to be that predictable. Can central banks move house prices? Possibly, but it’s difficult…"
Also McDermott:
“But the net consequence is, you’ve pumped huge amounts of liquidity into the financial system. It has to find a home, and it’s found it in asset markets. In New Zealand, the biggest asset market is housing, and that’s where it’s gone."
“Was it predictable? Of course, it was predictable."

Lol! Schrodinger's quantum predictability conundrum, where asset prices are predictably/not predictably moved by monetary policy. Niiiice. Give that man a beer/non beer.

Yes, truly remarkable self-contradiction!
How anyone in the industry could question that interest rates drive prices seems... odd, very odd. Like, just woken from a 20-year coma odd.

Nice one Rosey. Tbh, I think McDermott speaks with a forked tongue. Another one who needs to be popular for self affirmation.

I just see it as obfuscation and misdirection word salad for policies that clearly screw the poor, the wage earners and centralize control in a circle of wagons closest to the money printers and politicians. Effectively we are a command economy like China, but without the manufacturing base and the productivity gains. They should come out explicitly and say, look we're going to defend the banks, the banks lend to households first and foremost, you can be a BENEFICIARY of the banks being a BENEFICIARY of accommodative monetary policy by owning debt. We are not in the business of making it cost effective to diversify or develop our economy. The tax incentives and monetary policy stipulates that you must align yourself with a bank fiefdom, buy into slavery, and be rewarded for your loyalty. But you are not free. And markets are not free. And we will not allow markets to be free, or the real cost of this state of bank defence will be too much to bear. Oh by the way, we will continue to tax you while we borrow as well. Because we can.

McDermott ran the policies for inflation for the last 20 odd years, the majority of house price rises were overseen by him. He kept the pedal to the metal to meet his inflation targets, and did a good job. But caused a huge overvaluation in property to achieve that.

The issue is the structural productivity issues that aren't addressed on the fiscal side. If they were solved, rates would normalize and inflation would be met.

Until then, NZ will forever have to run a relatively negative interest rate. Unlike the traditional Wicksell model of Central Banking, reserves are generated by the property market incrementally increasing at each resale, not by the Central Bank's actions on actual reserves.

Thus general consumer price inflation is pre stored and suppressed in the property market itself.

Werner again. Without a discussion on GDP/non GDP window guidance we might as well piss all that stimulus into the nearest lowland waterway.

That's a bit ironic given that Matt King actually figured out why property rises and falls at the immutable level. He should know better but maybe he didn't realize the depth of some of the research notes he put out after the GFC.

Princes Of Yen, Verner etc, it's all basic stuff, no offence. Once you look into it in great detail, you'll see there are such an endless source of large drivers to real price growth. The banking sector growth is actually entirely symptomatic of larger factors. Same with policy maker settings on monetary policy. Fiscal policy is largely about voter choice and is a laggard in that space.

Real asset prices tell no lies. Hint, property is already falling and nobody's noticed.


I can't believe how some of the most prominent of New Zealand's mainstream media (TVNZ and Stuff) are so politically biased towards Labour such that legitimate debate on important economic and social issues is pretty well stifled and Government embarrassments are either ignored or glossed over. These media are more concerned with questioning the credibility and invoking discord within the Opposition rather than analysing the performance, or lack of, of the sitting government. Democracy is dying while we watch on.


The Govts kneejerk response to any criticism of their policies is to immediately segue into accusations of racism. Willingly aided by blatant propaganda from the compliant & financially dependent MSMedia.

Actually, the biggest failure is the MSM which isn't financially dependent - Radio New Zealand.

They peddle porkies daily - and if anyone associated with them wants to challenge that statement.......

But they won't. They'll run a mile and hide a mile deep, before they do that. And one asks: Why?

And their selection of articles shift off the main page so rapidly, that even if they were 'holding power to account' as they claim when asking for money, there would still not be enough equal exposure to this information among the general public, for people to be able to discuss the issues adequately. Everyone should check out the romanian Collective documentary, for a sobering reminder of just how important true journalism is to sustaining even a semblance of democracy. Here's the trailer:

The media have forgotten that their job is to hold the Government to account. Instead, many of them are holding the Opposition to account. Just one of many things that, somewhere along the line, has become backward in NZ.

First legit comment I've seen on here!


Michael Reddell is someone I respect, but his fixation on the RMA being the end all and end all to solving the disaster is misguided IMO. Sure it is necessary. But it misses the point. Even if you liberalized land-use regulation today, I very much doubt the supply response would happen. NZ doesn't have the companies and resources that can mobilize and build affordable housing. And the govt will not do it. They lack the competence and it goes against their dogmatic beliefs in the status quo about their role and philosophical underpinnings.

Furthermore, Michael steers clear of the idea that the bubble has been created by credit: the banks' ability to lend into existence to bid up house prices. He sees nothing abnormal about at all. I would say that this is just too difficult to admit for someone who has been part of the apparatus that enables the whole charade. There are too many smart people around who would say that this is the single biggest cause of what's happening in NZ / Australia in particular, but also across the Anglosphere and developed countries. The ruling elite know nothing else.

Yes, and he's in favour of urban sprawl in every direction and everyone commuting in cars, glossing over the billions all the new motorways would cost and ignoring all the carbon being spewed into the atmosphere.

I sort of thought he was quite good until he went on endless rants on the need to take the OCR deeply negative...

Nationalise the banks and be done with it


This Govt is prioritising building a pool for the ORCA.We are a kind Govt.


"Arthur Grimes: RBNZ and the Govt have engineered a 'wellbeing disaster' "

Exactly, 100% right - and this current ultra-loose monetary policy is extremely reckless and destructive to the longer term balance and health of the NZ economy and society.
Firstly, Orr should be sacked and replaced by somebody who has the competence and balls to immediately raise the OCR to 1%, and signal further increases to the OCR until we make sure that inflation is not going to be sustained, and the housing Ponzi is controlled.
Secondly, this Government must be held accountable for not acting to control the inflating of the housing bubble, and for sitting idle while the RBNZ wrecks the NZ economy with its shortsighted, dangerous and reckless overcooking of the NZ economy.Not that National would have done much better, mind you, but it is time that we held the individuals in charge accountable for their mistakes.

Correct that pig headed buffoon Orr completely over reacted and over cooked it, dropping LVRs and interest rates and continues to make it worse by telegraphing changes to a market that feeds on greed and fear.

Are they just academics you live in an ivory tower, somewhat detached from the real world?

The central banks experiment is a failure to a large sector of society are living with / paying the price on a daily basis.

The policy has run its coarse, interest rates can't be pushed lower without driving up inflation. what's the option to increase interest rates which leads to an asset paper value re-set, real-estate, stock, bonds shares.


Yet more evidence of the madness of trying to influence a complex economic system with a single and fairly impotent policy lever - the 'OCR'. The ONLY thing that a low OCR is pretty much guaranteed to do is reduce the cost of borrowing. And, the only thing that reducing the cost of borrowing is pretty much guaranteed to do in most developed countries is increase house (and financial asset) prices and encourage wealthier people to spend a bit more. The idea that a low OCR persuades businesses to invest in actual productive capacity or innovation has a near-zero evidence base. It sounds like a good theory in the econ 101 lecture theatre, but out there in the real world things are quite different.

Controlling inflation requires an understanding of what is driving price increases in specific products / sectors - and an analysis of whether this is a permanent change (due to increased regulatory costs for eg) or a temporary one (supply chain disruption or a labour shortage). Then you need to assess whether the market will correct the issue on its own (higher prices create margins, encourage new entrants and more competition). This is the kind of analysis that central banks / economic policy units should be doing in the modern era.

Yes to all that -- I believe there was a recent piece of academic research floating around which showed no correlation between reducing rates and improving economic growth once rates were already below a certain point, around 4% from memory? Which makes perfect sense; a percent or two difference isn't going to make a difference to the viability of an investment -- *unless* that investment is not productive per se but entirely premised on borrowing at a low rate and making up the interest cost with capital gains, ie property.

When economic growth ignores debt (last I checked, it took over $3 of US debt to 'create' $1 of US GDP), what is it?

And therefore, what is the divergence of which you speak?

One can read tea-leaves, entirely ignorant of the fact that the tea-caddy is empty.

I would think you, of all people, would be interested in the difference between activity which uses/transforms actual resources, and activity which simply creates an extra set of promises about the future (in the form of debt)... The distinction may not be growth vs. non-growth, if we use economists' terms, but it's *something*...

Net debt across the world is currently ZERO - unless people have started borrowing from space aliens?

What matters (as you often remind us) is REAL resources, and at the moment we are borrowing real resources from future generations to feed our over-consumption, wasteful societies and economies, and to support super-yacht, 'Branson and Bezos in space' level inequities.

A wellbeing budget for NZ would focus on the sustainable use of real resources and the wellbeing of the people that live here. Money would simply be a medium of transaction, Govt debt would be a meaningless number, and household debt would plummet.

We are on the same page, sort of. I see the debt - regardless of who holds the parcel - as a demand on the future, and in particular, on future resources. So much we align on.

But the debt is not equally owed/owned. The debt is fractionally-backed by paper which has to be believed-in, and the paper is believed-in because folk think it will be future-underwritten too. And it's taking more debt than the planet is claiming in GDP, to 'produce' the GDP. The shortfall, the method of issuance and the lack of future underwrite, tells me that the one thing we don't have 'Price Discovery' on........... is Money.

Oh, and you have to de-couple 'wellbeing' from consumption :). Here's a goodie explaining the divergence:

I still don't see how a disregard for debt, can work. It's a bit like laws without policing, courts and penalties. What's what worth? Obviously you don't need tax - a Govt could just write numbers, choose to do anything, cancel numbers, goodnight. Sounds just as out-to-lunch as fractional-reserve-forever, to me.

Consumption and wellbeing de-couple themselves at around 12,000 USD per capita of GDP when you compare countries (and at household income levels of $80,000 NZD from memory)

I only have disregard for Govt debt - it is simply the amount of money that Govt has spent that it has not taxed back yet. The key risk with a persistently high Govt spending / tax ratio (aka high Govt debt), is that Govt causes inflation by bidding against the private sector for limited real resources. Govt should therefore be concerned primarily with the impact of its spending - both positive (wellbeing, sustainable future etc) and negative (inflation).

John McDermott - Motu Executive Director and former RBNZ Assistant Governor and Chief Economist - isn't convinced there's a strong enough relationship between interest rates and asset prices for the RBNZ to target the latter.
Who is kidding who?

Wealth effect or wealth illusion?
The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.

There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?

There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.

Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.

The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.

But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.

Does this guy not know what happened to ACC?
ACC announces $8.7 billion deficit for year as interest rates plummet
ACC has posted an $8.7 billion deficit for the year, with record-low interest rates taking a major chunk of out its long-term forecasts.The corporation presented its 2018-19 financial results to Parliament on Wednesday, with a huge increase in its "outstanding claims liability" (OCL) producing its highest-ever deficit and overshadowing other results.The OCL is the amount of ACC estimates all its current claims will cost over the next 100 years. Lower interest rates mean the fund has to invest more now to cover costs down the track.

The RBNZ cut interest rates in half five times since July 2008 and has proposed to do so again. When interest rates are cut in half the present values of cash flows are doubled for both assets and liabilities.


Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%.

Thus around 60% of NZ bank lending is dedicated to residential property purchases for one third of already wealthy households because the RBNZ offers them a RWA capital reduction incentive, to do so.

Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $307,871 million (63.13% of total lending) as of April 2021.

i suspect he is kidding himself... ie... borders on delusional..?
It is very disturbing to hear this view from an ex high level official ... ie.. no strong relationship between interest rates and asset prices..

Also disturbing to see these high level officials holding opposing views.... blinded by different lights..

These are the people who implement policy.... as if it were the "truth"... not wise enuf to be open to allowing reality to show their "beliefs" to be somewhat wrong, or to study the lessons of history, beyond their own lifetime...

If you've ever sat down with McDermott you will realize how much of a brain he is when it comes to economics and inflation.

Just a tip when someone in the position he is, says something that sounds counter intuitive, it's likely that it's well thought out, and there is a reason why he's saying that. I.e there is actually no strong relationship. Try to think about why that would be the case rather than scoffing.

Although I think that might be a little more earth shattering for you given how strongly you align with the whole 'anti rbnz, anti property investor' narrative on here.

Good article.
The change of the inflation band high end from 2 to 3% has given Orr the perfect excuse all the way through.
Should have stayed at 2, but they knew this of course, preparing for QE scenarios.

Great article Jenee.
Also, watched this documentary about the power of fed (central banks) which highlights the same issue with lighter note as it was created by PBS -

“We have problematic house price inflation mostly because of land use restrictions and they need to be tackled at source…"

BTW - this is also the easiest cure for stagflation if it should ever occur. Opening up more land is both deflationary and stimulating.

Yes! Nice to see someone put it simply.

Kind of amusing the creator of the tool is now complaining about how people use that tool.

Market turmoil is brewing and building up in the USA- there goes the dream of any meaningful rise in interest rates across the world, NZ included.

There is no better asset than real estate to hedge financial uncertainties.

Yes it is amusing. Grimes has been a bit inconsistent on several things in recent years.
Mind you, with regard to the OCR, you can reasonably argue that circumstances and the policy setting requirements change over time, and maybe his position is not inconsistent.


Just to reiterate what I have said in the past. Current clowns in government will go down as worst PM and government in NZ history! And we have had a few really bad past governments!!

+1 great article.

1) Its absurd that house(land) prices aren't in the CPI. Accommodation is a consumer necessity. One cant live in a house /apartment without land even if its leasehold. I dont agree with Redellel/McDermott/Grimes.

2) Asset prices - these have blown out since the 1980's in NZ through increased land prices as nominal interest rates have plunged from 20% to near 0%.

3) We've then scored many own goals since the 1980's by having a restrictive RMA, high immigration & no comprehensive capital tax at the same time.

4) The RBNZ then blew the top off everything. With zero immigration & a deficit of housing there is no other reason for the absurd blow off in house (land) prices except the ultra low interest rates & reduced LVR restrictions.

5) The RBNZ board should be sacked they have failed to meet their statutory obligations. "... the Reserve Bank Act 1989 specifically included the phrase, “general level of prices”, to not limit the monetary policy target to the CPI."

6) The real pain will happen as interest rates eventually rise - zombie companies going bust, higher mortgage payments & distress, less money in the economy - a vicious cycle.

7) Can we actually have a have a government that can govern properly. Or is NZ doomed to continually have governmental and corporate failures (Eric Watson, BNZ, AirNZ etc etc etc)


Pathetic. Labour should never mention wellbeing again as one of their objectives.

It's more their objective than the sad has-beens on the Nat bench.

But they have all been blindsided by the blinkered horse that is Economics. Growth forever on a flat earth, for ever and ever, apeople (presumably one has to end prayers in a PC manner nowadays).

The previous government was making steady and effective progress on wellbeing across all demographics. Targeting those genuinely in need and measuring based on outcome, not on how much they spent. The current idiots could not see past their petty student ideology and threw out effective programs simply because they were Nationals despite the obvious success.

Special housing areas, not without issues, were however a National policy that gave a shot in the arm to housing supply and no doubt were a factor in flat house prices around 2015-2017. The twit Twyford dumped them simply because they were a national government initiative.

Not surprised Grimes is still finding it hard to turn around the inequality supertanker. Today, Doug Casey sent out this interesting quote from Alexander Tytler, 1787:

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”

I'm going out on a limb here, but I don't think 21st century NZ will be the democracy to figure out how to break the cycle, and we are WAY at the end of it.

Wow, very profound.


Add to your article : Reserve bank losing control :

Interesting time ahead. How long can they hide behind transitory inflation theory. Earlier they bite the bullet and stop manipulating asset class, better for them as now they are totally screwed.

Now we wait and watch.

Add to your article : Reserve bank losing control :

Interesting time ahead. How long can they hide behind transitory inflation theory. Earlier they bite the bullet and stop manipulating asset class, better for them as now they are totally screwed.

Now we wait and watch.

I have a problem with some aspects of inflation targeting aside from housing.
What is usually termed good deflation is productivity-driven and what is termed bad deflation is demand-driven.
If for example the price of oil falls due to international factors not local, they take this into account in the CPI targeting and lower OCR to meet targets when they really shouldn't as there's no underlying weakness.
Here's a mid 2015 example of this, property was "increasing rapidly" in Auckland at least, economy was steady yet they lowered OCR and kept doing so into 2016.
the whole list of decisions:

Reserve Banks role is to help but instead are distorting the economy thereby destroying its fundamental for short term gains.

How long before central bank lose their control and place in economy, to be seen.

This article is spot on. But it is important to remember that the RBNZ Governor is basically a compliant servant of the current government, which believes it can simply print money to win the next election.

Really interesting range of comment, from technical aspects of economics to broader comments about just where society is headed. From my perspective, one of the most damaging trends is that people, from lower socio economic status, certainly, and arguably, those in the middle too, are increasingly relying on the beneficence of government.
This might be part of a "cunning plan" if one is a conspiracy theorist believing that is precisely the aim of the current government, or perhaps simply the human reaction to increasing difficulties in broadly, trying to "make a buck" and live roughly like the Jonses next door.
In the thirties, an idealistic Labour government told ordinary folks that they no longer needed a bank account, because government would look after them in times of need, eg old age or in sickness. And the result? The smiling picture of dear leader...M J Savage was attached to many walls of modest homes..."the man who saved us from the Great Depression!
My worry, apart from the refusal of governments of all shades just looking to the next election, is that significant proportions of our population are losing confidence in self reliance and that their hope now resides in a "kind" gummit.

Something fishy about this. Surely as an architect of monetary policy in the late 80's he would have been aware that land prices, the cost of existing houses and the cost of servicing a mortgage were included in the CPI.
As RBNZ Chairman for 10 years from 2003, he must have been aware that Shipley and Bolger removed these components of the CPI, leaving only a small weighting for rents and new builds. He must have known the implications of this; the ability for house prices to skyrocket without impacting interest rates so nothing to contain them.
I think he's beginning to realise that piece of malevolence towards the poor is becoming mainstream knowledge, and like Bolger feeling a little nervous.
Tinkering with a solution to try and cover tracks is not going to resolve the issue.

"Stats NZ does not track changes in the price of existing (second-hand) houses. This is because expenditure on existing dwellings has no overall impact on the stock of owner-occupied housing: each sale of an existing dwelling (negative expenditure) is cancelled out by a corresponding purchase of that dwelling (positive expenditure)"
Whilst this is true the additional cost of housing and debt servicing has a knock on effect of discretionary disposable income being reduced so I wonder if this effect is reflected elsewhere in working at the CPI in terms of overall consumption??