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Rodney Dickens looks at the RBNZ's housing experiments, its exchange rate game, and assesses what sort of a Governor Graeme Wheeler is

Rodney Dickens looks at the RBNZ's housing experiments, its exchange rate game, and assesses what sort of a Governor Graeme Wheeler is
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By Rodney Dickens*

It is normal for Reserve Bank governors to try new experiments, but more often than not they turn out to be bad ideas (e.g. Governor Don Brash's short-lived experiment with a monetary conditions index that put too much emphasis on the exchange rate and Governor Alan Bollard's go-for-growth experiment that resulted in a boom-bust housing cycle among other undesirable things).

It is early days in Graeme Wheeler's tenure and we are still learning what sort of a governor he will be.

On a positive note, Graeme appears to be mainstream, which reduces the risk of boom-bust cycles for the housing market and borrowers.

But he is also showing hints of possibly being a control-freak (e.g. claiming there is a high correlation between the exchange rate and commodity prices to support his crusade to get the exchange rate down when there isn't, and introducing questionable controls on mortgage lending).

This Raving looks first at the case for more stable interest rates and tentatively concludes that Governor Wheeler will deliver a more stable interest rate environment than his predecessors.

I see this as core to the governor making quality monetary policy decisions in light of the unnecessary cycles in interest rates, the housing market and other parts of the economy caused by previous governors.

It then looks at the exchange rate game Governor Wheeler is playing and warns that this rings some warning bells.

Thirdly, it looks at the governor's meddling in the mortgage market and warns that even though this meddling is motivated by good intentions it will most likely result in unexpected and undesirable consequences.

Finally, this Raving restates the case for an independent central bank, but with the proviso the governor receives a due amount of public scrutiny, like that offered by this Raving.

Governor Wheeler may deliver more stable interest rates than his predecessors

I have campaigned in the past for more stable interest rates and it looks like Governor Wheeler may deliver much more stable interest rates than his predecessors.

Governor Brash first had to break the back of inflation with high interest rates, but even after this was achieved in 1992, interest rates were prone to change dramatically from year-to-year (see the Brash era identified in the adjacent chart).

This was the Wild West period for NZ monetary policy.

By historical standards, interest rates were low before the Bollard era started in September 2002, but Alan continued with low interest rates for far too long in what I dubbed the "go-for-growth" experiment.

The experiment with unjustifiably low interest rates resulted in an inflation problem emerging and Alan ended up hiking the OCR 13 times between 2004 and 2007.

To me the key feature of Alan's tenure was painful boom-bust cycles in the housing market and and borrowing costs, rather than him rescuing us from the financial crisis by cutting the OCR from 8.25% in June 2008 to 2.5% in April 2009.

Lots of lessons should have been learnt at the Reserve Bank from Brash's Wild West days and Bollard's "go-for-growth" experiment.

Hopefully, Governor Wheeler won't be so likely to deliver unnecessarily large cycles in interest rates, the housing market and other parts of the economy impacted by interest rates. This assumes Graeme is open to learning the lessons from history.

This doesn't mean interest rates will be boringly stable. Governor Wheeler delivered four quick OCR hikes in the first half of 2014 when it became clear interest rates were too low relative to the level consistent with the medium-term inflation target.

But rather than over reacting to events by hiking excessively, as Governor Brash did at times, or keeping interest rates too low in the hope an inflation problem wouldn't emerge, like Governor Bollard did, it looks like Governor Wheeler is searching for the level of the OCR that is consistent with keeping inflation low on average over the medium-term.

The "neutral" or "equilibrium" level of the OCR isn't easy to calculate and can change over time and even significantly if major events like the financial crisis occur.

But critical to avoiding unnecessary cycles in interest rates etc is a central bank governor who is at least focused on setting the OCR in the ballpark of the neutral rate rather than over or under reacting to events.

However, it is early days and I can't rule out the possibility Governor Wheeler will end up being at least moderately reactive; resulting in more cyclicality in the housing market and borrowing costs etc than is necessary to achieve the medium-term inflation target.

The governor's exchange rate game is somewhat disquieting

Governor Wheeler seldom misses an opportunity to talk the exchange rate down; regular describing it as "unjustifiably and unsustainably" high (e.g.

There is nothing new in a governor being concerned about the high level of the exchange rate. A lower exchange rate would be good for exporters and local firms competing against imports, although it would also mean higher import prices.

But the governor's crusade concerns me in two respects.

My first concern is the history of governors putting too much emphasis on the exchange rate and in so doing overlooking a developing domestic inflation problem.

Domestic inflation, as distinct from import price inflation that is largely driven by the exchange rate, is central to medium-term inflation prospects. Domestic inflation reflects what is happening to the prices of goods and services that are produced in NZ and largely consumed locally. This is measured by the non-tradable component of the CPI that makes up around half of the goods and services included in the CPI, with non-tradable or domestic inflation at 2.4% last year versus 0.8% for overall CPI inflation.

At the moment overall inflation is low largely as a result of the high exchange rate last year, falling primary product prices and the fall in petrol prices.

The adjacent chart shows a high correlation between the annual % change in the NZD trade weighted exchange rate index and annual import price inflation (the right hand exchange rate scale has been inverted to better show the relationship). The appreciation in the NZD TWI over the last couple of years resulted in falling import prices measured in NZ dollars and this filtered through to lower consumer price inflation. But the fall in the exchange rate this year points to import price inflation turning positive, which will filter through to higher consumer price inflation.

As is often the case, the bank economists are being myopic and reactionary in focusing on the current low inflation that has nothing to do with the medium-term prospects for inflation Governor Wheeler is supposed to focus on.

There is the potential the labour market, that is central to medium-term domestic inflation prospects, will start to pose a threat this year, which is what the focus should be on. But instead, as has been the case in the past, the bank economists are assuming this threat away.

If the governor's crusade to get the exchange rate down means he takes his eye off what is central to medium-term inflation prospects for a period (i.e. the risk the labour market will head into the danger zone this year), it will increase the future upside risk to the OCR. At the moment this risk isn't anywhere near as large as was the case in the early-to-mid-2000s when Governor Bollard was playing the go-for-growth game, but it still warrants consideration.

The problem is that if domestic inflation is allowed to get a bit of a head of steam up it will require more OCR hikes to fix than would have been the case if the governor had acted proactively in hiking. It isn't a certainty, but the governor's misguided campaign to get the exchange rate down could cause problems down the track.

I suggest the governor's campaign is misguided partly in the context of the unlikelihood it will ultimately have any impact on the exchange rate and partly because the claim the exchange rate is "unjustifiably and unsustainably" high is debatable. It makes sense to me the NZD is high relative to the currencies of most of our major trading partners because of the debt mountains they have that will limit economic growth and how much interest rates can be increased for some years to come.

In the case of the US, there are some signs the economy is normalising, but even there some major challenges to economic growth have emerged or are likely to emerge, as covered in our monthly economic reports.

My second concern may have implications beyond the governor's crusade to get the exchange rate down. What is somewhat disquieting, are the lengths the governor has gone to in his attempt to talk the exchange rate down, including claiming there is a "high correlation" between the exchange rate and commodity export prices.

Assessing correlations between two indicators in level terms can be misleading, while if there is a high correlation it should be evident when annual % changes are compared, as is done in the adjacent chart.

There was a relatively brief period between 2006 and 2011 when the was a high correlation between the two, as highlighted by the boxed area, but since 1990 the correlation between the annual % change in the NZD trade-weighted exchange rate index and annual export price inflation has been a relatively low 0.46 (i.e. a bit like a 46% mark in an exam, which to me is a fail mark not a high mark). Maybe my ex-colleagues at the Reserve Bank have tortured a mathematical model of the economy until it shows a high correlation between the exchange rate and export prices, but there clearly isn't one.

As a former member of the Reserve Bank's Monetary Policy Committee I find it disquieting that a governor will make claims that are wrong.

However, it doesn't surprise to me that the bank economists aren't highlighting the dubious lengths the governor has gone to justify his calls for a lower exchange rate.

The governor can pat himself on the back for championing the cause of exporters and local firms competing against imports, while maybe he thinks it is good for us to have more expensive overseas holidays and to pay more for imported consumer goods.

But totally aside from the merits or not of his campaign is the possibility he may be something of a control freak or zealot (i.e. someone willing to go on a crusade justified by dubious claims). There isn't anything unusual about unjustified crusades in the global geo-political arena. But it concerns me if we have a governor who is willing to make unjustified claims in pursuit of a dubious crusade.

One of the unique features of our six weekly Monetary Policy Briefing reports is that we go where others fears to tread in assessing what type of governor Graeme Wheeler is sizing up to be, as well as including the best available analysis of whether the Reserve Bank's forecasts are well found and the implications for interest rates etc. 

Some lessons from Muldoon's attempts to control mortgage lending are warranted

The Reserve Bank and most central banks experimented with low interest rates in the early-to-mid-2000s. This contributed to the housing bubbles that occurred in many developed countries.

Central banks around the world, including the Reserve Bank, are now trying to protect us against the risk of another housing collapse via bank lending restrictions and other impositions on the banking system related to mortgage lending. There is more than a bit of irony in this.

My view is that central banks want to be seen doing the right thing regarding banking system stability, but can't necessarily be trusted to do the right thing.

No matter how well justified the lending restrictions on low deposit borrowers and the planned targeting of investors by the Reserve Bank may seem, history teaches us that such interventions impose costs and will most likely have unexpected and undesirable consequences.

History has also taught us that central banks do not know best and too often have been a source of volatility rather than bearers of stability (e.g. the experiment with low interest rates in the early-2000s).

A better idea than the bank lending restrictions would be restrictions on experiments by central banks. The banking system was subject to a wider range of restrictions by the Rob Muldoon Government in the first half of the 1980s. Attempts to control mortgage lending by banks resulted in around 40% of total mortgage lending being conducted via lawyers' trust accounts. The restrictions were undermined and borrowers ended up paying higher margins for debt than would have been the case otherwise.

Whenever restrictions stand in the way of people doing what they want to do, most people will find ways around the restrictions, but at a price. Low deposit borrowers will find inventive ways of getting around the lending restrictions, but in so doing some will become more at risk of defaulting because they will end up paying higher total interest costs than would have been the case otherwise. Will that reduce or increase the risk of financial system instability?

Forcing banks to discriminate against investors because overseas evidence during major housing collapses has shown they have a higher default rate than owner-occupiers looks like being extremely reactionary to overseas events of potentially minimal relevance the NZ prospects.

The cost of imposing such restrictions should to be weighed against what I believe is a phenomenally low probability NZ will experience an Irish scale housing collapse.

The case for an independent central bank and for scrutiny of the governor

An independent central bank provides an important constraint on politicians.

It means that if the government became reckless in spending taxpayers' money to buy votes, it would face the threat of interest rate increases.

That threat will only exist if the Reserve Bank is independent from the government (i.e. I am a fan of an independent central banks).

But rightly or wrongly, New Zealand has opted for a system that gives the power over interest rates to one person: the Reserve Bank Governor. This means the governor is more important than the Minister of Finance for borrowers, people and firms impacted by housing market cycles and for many others.

On a regular basis the governor has to report to Parliament's Finance and Expenditure Select Committee, while the Minister of Finance decides whether a governor will be reappointed.

The governor faces some accountability, but this accountability didn't stop past governors from embarking on misguided experiments.

I believe there a need for independent scrutiny by someone with long standing expertise in the area of monetary policy. That is, someone like me, who has been a member of the Reserve Bank's Monetary Policy Committee, worked at two central banks and spent over 25 years outside the Reserve Bank monitoring and reviewing interest rate decisions by successive governors.

I will produce an occasional report card for the governor that reviews his performance based on objectives I think are important from the perspective of the economy.

My particular interest is in whether the governor will operate monetary policy in such a way it minimises unnecessary cycles in interest rates etc.

My secondary focus will be on whether the governor is imposing unnecessary costs on the economy and individuals in pursuit of dubious objectives.

But I will also analyse the governor, which is different from analysing OCR decisions. To some this may seem like "playing the man, not the ball".

But to me it is just as important to assess what sort of person Graeme Wheeler is in the context of him being the governor as distinct from clearly personal issues (e.g. Is he open to healthy debate? Does he exhibit control-freak-type characteristics that could lead him to pursue a faulty course of action for too long? Does he have a clear plan of action or is he making it up as he goes along? Is he dogmatic or pragmatic? Is he reactive or proactive?)


*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.

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[ silly rant removed. Please make sensible comment focused on the issues raised by the author. Ed ]



Totally agree that the 'one man band' option is dangerous.

We may get another Robert Muldoon.

Then again the RB Governor should expect some policy assistance from his politicians than he has had so far. He flies in the face of rampant immigration and nil control over hot money investments


The above article discussed the issue of critiquing what kind of Governor Wheeler is/will be. 

His tenure at the World Bank from 1997 to 2010 is likely to have influenced his views on  financial system priorities from a global perspective, rather than just a country-based perspective. 

One of the missions of the World Bank is to:

"Promote shared prosperity by fostering the income growth of the bottom 40% for every country"  

So NZ is likely to be a willing participant in this kind of aim - which is not necessarily putting the average household in NZ in first priority. 




Wheeler is not radical , in fact he is quite conservative and orthodox in his approach BUT interefering in the only truly free market in NZ is misguided at best and utterly stupid at worst .

The Auckland house price increases have nothing to do with speculation , and everything to do with the banks being given leeway to lend on mortages ( at the behest of the monetray authorities themselves) .

Its good to remember that the market is usually right , and a free market such as our property market is likely right on the money .

Its worth re-iterating the fundamentals driving the market


  • There is a desprerate supply side problem , caused by Auckland City mismanagement and incompetence , and their rorting the system for fees , levies and charges that adds $100,000 to $200,000 to the price of a section .
  • A tsunami of new  migrants , around 150 new people every day.
  • Land banking , which is purely specualtive and constrains supply
  • And cheap money from Banks . 



Wheeler is doing OK. A lower exchange rate will help us more than hurt us right now. At least we don't have negative interest rates like several OECD countries do.


The property market is booming in the main cities of quite a few countries, not just here. Given there is no prospect of earning much or any interest on capital on a bank deposit, and the risk of lending your capital to a bank due to open-banking resolutions implemented by world-wide RB's, a corrupt gravity-defying sharemarket and dodgy capital notes and bonds, property is a no-brainer for a positive income return and relative security of capital based off being an asset for which an enduring real need and demand exists. You know, boring old "bricks and mortar".


Essentially real estate is the new gold? My research indicates that people used to flock to gold during periods of financial instability. Admittedly real estate makes more sense than Gold ever did.


Untill disaster strikes


Dickens asserts the governor is meddling in the mortgage market and warns that it will result in unexpected and undesirable (unintended) consequences.


I don't envy Wheeler - This is not a closed loop issue

It has been noted before that IMO the Governor of the RBNZ is being hung out to dry by the Government. I am on the record here in that Wheeler should have given the Government the two-fingered salute and walked away from the job


I see it through a different prism than Dickens


It's determined by the behavioural investment decisions of the populace who respond to Government Policy Settings most of which Wheeler and the RBNZ and monetary policy have no control over

While property was beginning to lift off prior to the GFC it wasn't out of control
Instead, many people were depositing their money with Finance companies and earning a taxable 10%


Now, with the finance companies gone they are left with the banks
Where they can earn a taxable 3%-4%


or alternatively today they can


(a) buy a fully funded rental property and earn a taxable 4%
(b) go in a bit deeper and get tax-advantageous negative gearing
(c) with the opportunity of earning an additional 10% per annum tax-free capital gain


So, where do you think the populace are going to plonk their money now?


If you are an inbound migrant with off-shore funds you get a 4 year tax-holiday which will encourage you to over-spend on a residence


That's what's driving the market - investment decisions - which are in turn distorting the market
And the RBNZ does not have the power to control the motivations that influence investment
The RBNZ can only deal with the consequences of slack fiscal policy and not the causes

And if the RBNZ brings in controls on Investment Loans, that will diminish the demand for investment properties and depress the prices investors are willing to pay, which in turn will increase the supply and reduce the entry price for tax-holiday-seeking migrants


Hindsight is always 20/20

The future is nothing like the past, its going to be volitile and a shrinking economy.



GW workedin the US during the subprime debacle. Property lost 30% very quickly. He forgets that the US has a different framework, whereby defaulters are able to hand the keys back. This mechanism creates big fluctuations during economic instability. it is also allows price corrections to exist.


NZ doesnt have this mechanism. GW is attempting  to artifically suppress demand, all whilst the government is actually exaserbating the problem, by ramping up demand. They are for all intents and purposes working against each other  - and frankly are looking bloody stupid in the process.


I know GW and the Crown are supposed to operate independently, but given the state of affairs it might be good for them to have a chat?



1. place constraints on immigration temporarily

2. sell off state houses as is proposed, levelage off that and through the state build affordable housing. refer singapore model.

3. remove stupid lvr contraints. introduce a multiple of earning limit





That is not quite right. Only eleven mainly western US states have non-recourse lending laws (allowing jingle mail). The other ~40 use systems just like here where the loan is to the borrower, and the liability is held by the borrower.


Of the 11 with non-recourse lending rules, only one is a large state; California. Texas is not one of them, nor any in the Midwest, Northeast, or South.


that may be very well correct. i am not an expert on the US non-recousre lending rules by state. however i can vouch for the fact that this was widely reported during this period. in addition economics 101 suggests that any increase in supply will have a negative impact on price, where demand falls, or in the case of the US disappears altogether.


Macroecomonomically taken into account domestically this had a dramatic impact on the price of housing in the US for a number of years.


Also for the record i have attended numerous functions held by GW, and it came through loud and clear that he did not want the same conditions to replicate here. in fact this was his complete focus 


...and in my humble opinion  the horse has well and truly bolted. the RB and GW have lost  control.



I'd like to see a RBNZ committee vote rather than in the hands of 1 person and I do not think think an ex board member is the right person to keep tabs on the governer as teh author suggests he is.

A lot of the article seems to be more of the same and less use of what we have wile you are at it. Very much a property/investor bias where the governer is at least looking at the wider economy.

'Extremely foolish' to cut rates, says Mark Carney

Mark Carney has said it would be "extremely foolish" for the Bank of England to cut interest rates to try to combat low inflation.

The Bank of England governor reiterated comments made in February that the drop in prices was temporary and largely caused by the sharp fall in oil prices.

(Guardian 10.03.15)




Well, the UK couldn't get much lower at 0.5%

Spot the odd one out:  



(Federal Reserve) Federal Funds Rate 18.03.2015 16.12.2008 0.25% Eurozone ECB
(European Central Bank) Refinancing Tender 15.04.2015 04.09.2014 0.05% UK BOE
(Bank of England) Bank Rate 09.04.2015 05.03.2009 0.50% Japan BOJ
(Bank of Japan) Overnight Call Rate 17.03.2015 19.12.2008 0.10% Canada BOC
(Bank of Canada) O/N Lending Rate 15.04.2015 21.01.2015 0.75% Switzerland SNB
(Swiss National Bank) 3 Month Libor Rate 19.03.2015 03.08.2011 0.00% Sweden Riksbank
(Sweden Central Bank) Repo Rate 29.04.2015 12.02.2015 -0.1% Australia RBA
(Reserve Bank of Australia) Cash Rate 07.04.2015 03.02.2015 2.25% New Zealand RBNZ (Reserve Bank of New Zealand) Official Cash Rate 11.03.2015 23.07.2014 3.50% Norway Norges Bank
(The Norwegian Central Bank) Sight Deposit Rate 19.03.2015 11.12.2014 1.25%