By Bernard Hickey
Speaking less than a year out from an election that the Government might be tempted to try to win with a spending spree, Reserve Bank Governor Graeme Wheeler has warned the economy does not need looser fiscal policy to hit the bank's inflation targets.
Wheeler was asked at his news conference if the Government could help the Reserve Bank to achieve its inflation target. Earlier the Reserve Bank cut its Official Cash Rate by 25 basis points to a record-low 1.75% and forecast a flat OCR until at least the end of 2019, arguing monetary policy was accommodative enough to push inflation up to the middle of the bank's 1-3% target band. See more in our earlier article.
In answering the question, Wheeler said the economy was growing faster than its potential, which was generating inflationary pressure.
"The economy's growing probably at around 3.5%, maybe a little bit faster. We think potential output growth's probably about 2.9% so you are creating a positive output gap," Wheeler said.
"So would you say to yourself: do you need fiscal stimulus at this point? And the answer is probably not, no you don't," he said.
Wheeler said Governments would always need to make decisions about whether to spend on current consumption or infrastructure investment.
"If I look at the housing market there are issues around increasing housing supply up in Auckland, and to the extent that there are regulatory issues or there are land availability issues or infrastructure constraints and bottlenecks, and if that's something that could be handled through expenditure allocation or engagement with the councils to get improved outcomes then that's all to the good," he said.
"But I don't see any need at this stage, given where the economy is, for further fiscal stimulus."
Later at a Parliamentary Select Committee hearing, Wheeler repeated the comments about fiscal stimulus not being needed, although he added that fiscal policy help might be needed if economic growth were to slow dramatically.
He also pointed to other parts of the world where central banks had done as much as possible with monetary policy and needed help from their fiscal policy 'mates'.
"What's happened in other countries that have pushed interest rates down to zero or even negative, or who have had substantial Quantitative Easing is that you've seen too much pressure placed on monetary policy and Governments have been reluctant to move on the fiscal policy side. The fact that CBs have stimulated through monetary policy has taken pressure off Governments for structural policy reform," he said.
So we're in a situation now where I don't think the economy needs fiscal stimulus at this stage. It's growing at 3.5 to 4%. But if we did slow down dramatically, then clearly we would look at what scope we've got to adjust with monetary policy, but you'd also want fiscal policy coming in," he said.
Earlier in the news conference Wheeler was also asked about the potential for currency intervention to push the New Zealand dollar lower, given he had said in the MPS statement that the currency was higher than sustainable for balanced economic growth and a fall was needed.
"That's something we would always have an open mind on," Wheeler said.
"We look at the case for intervening at the time that we take our decisions around an OCR. We've got a system of four traffic lights and we look to see whether the conditions are met at any point, so we have an open mind about intervention," Wheeler said.
The Reserve Bank has intervened once to sell New Zealand dollars during Wheeler's term after assessing its four 'traffic lights'. The system requires the bank to be sure the currency is extreme, unsustainable and that any intervention was consistent with current monetary policy. Any intervention would also have to have an impact by catching the market 'off guard' at times of volatile and illiquid trading.
Wheeler declined to say if the four 'traffic lights' were currently green.
His comments were unusually strong, given he often downplays the prospect or effectiveness of currency intervention. See more in this March 2014 article on the potential for intervention.
'NZ$ not peaky or elevated'
Later, in an interview, Deputy Governor Grant Spencer downplayed the immediate prospect of intervention, saying the Reserve Bank had not intervened in recent times "and that's suggestive."
"Our approach tends to be to try to hit peaks, and in recent times there's been more peaks than troughs, and we're not around peak situations at present," he said.
"The TWI is still at elevated levels, but it's not up there like it was a couple of years ago."
Spencer said he would not put a "huge emphasis" on the bank's use of the phrase "not sustainable" in its opening statement.
'Neutral' rate down to 4%
Elsewhere in the news conference, Assistant Governor John McDermott said the neutral interest rate, which the Reserve Bank keeps an eye on over the longer term as a way of assessing whether its policy is stimulatory or contractionary, had edged down in recent years to around 4%. In this September 2015 paper, the Reserve Bank estimated the neutral rate for the 90 day bill rate was around 4.5%.
"The neutral cash rate has been gradually moving down over a period of time and that's probably reflecting the savings/investment imbalances we have seen globally," McDermott said.
"So there has been less investment than might have been anticipated, and there's certainly been an increase in savings profile, maybe from some emerging market economies, and that shift globally has changed the demand for loanable forms and capital markets and that's moved everybody's neutral interest rate around the world," he said.