Treasury is yet to be convinced the Reserve Bank’s (RBNZ) use of new or “unconventional” monetary policy to lower interest rates has increased wealth inequality.
Treasury Secretary Caralee McLeish shared this view with Parliament’s Finance and Expenditure Committee on Wednesday, despite Treasury and the RBNZ in January 2020 advising Finance Minister Grant Roberson quantitative easing (QE) may raise asset prices more directly than lowering the Official Cash Rate (OCR) would. This in turn “may” increase wealth inequality.
Yet responding to questions by Green Party MP Chlöe Swarbrick, McLiesh said: “It’s still too early to assess the full impacts of the pandemic on inequality.”
She said the RBNZ’s QE or Large-Scale Asset Purchase (LSAP) programme is playing a crucial role supporting the economy.
“You don’t think that’s driven more investment in housing?” Swarbrick asked.
McLiesh responded: “It does have flow-on effects and clearly lower interest rates is one of the drivers of higher house prices.
“But the overall impacts on wealth inequality are quite complex and difficult to unpack.
“Lower interest rates both benefit borrowers, as well as those who hold assets. And they also benefit the economy and open up more jobs. And so, the full picture on inequality is one that is quite complex. And we don’t yet have a detailed quantitative assessment.”
January 2020 warnings
Treasury and the RBNZ in January 2020 told Robertson using unconventional monetary policy involved “significant” trade-offs.
They provided this advice before COVID-19 escalated and the RBNZ ended up launching LSAP and Funding for Lending programmes. Together these programmes involve lowering interest rates by creating up to $128 billion.
Treasury and the RBNZ noted it wasn’t the RBNZ’s job to make sure the benefits of these policies were evenly spread across society from a fairness perspective, so said the Government may need to step in to mitigate some of the side-effects.
However, McLiesh on Wednesday steered clear of talking about the impacts lower interest rates, higher house and share prices, and lower mortgage costs have had on wealth inequality.
Instead, she responded to Swarbrick’s questioning by discussing the impact of COVID-19 on the labour market. She referred to the way women, young people and Maori/Pacific people are bearing the brunt of job losses, despite there being fewer job losses than expected.
McLiesh didn’t speak to media after the meeting and was otherwise engaged on Wednesday afternoon, so couldn't do a phone interview.
Interest.co.nz would’ve liked to clarify whether - as McLiesh's comments suggest - Treasury had softened its January 2020 view around government policies being needed to address the side-effects of unconventional monetary policy, and if so - why.
The backdrop to this is Robertson is considering Treasury and RBNZ advice on how to curb housing demand. He’s due to unveil his response at the end of the month. Housing Minister Megan Woods will announce further supply-side measures at the Budget.
The Greens, National and ACT are also on Robertson’s case over soaring house prices.
His defence over not acting on Treasury and the RBNZ’s advice has been that it was based on a “hypothetical scenario”. It was provided when neither agency saw the need for an LSAP or Funding for Lending Programme.
Robertson also made the argument, in response to a question in the House by National Shadow Treasurer Andrew Bayly (see video above), that the RBNZ and most economists were in mid-2020 forecasting house price drops.
Some direct impacts of lower interest rates
The country's median house price has increased by $121,000, or 19%, in the past year.
Someone with a $500,000 mortgage, paying the average 1-year rate will be paying $73 less per week than they would've been paying a year ago.
Meanwhile households charged the median rent will be paying $20 a week more.
And someone with a $100,000 term deposit, receiving the average 1-year rate, will be receiving $1,700 less annually in interest (gross) than they would've a year ago.
RBNZ puts onus on Govt
Contrary to McLiesh, RBNZ Governor Adrian Orr clearly put the onus on the Government to respond to the side-effects of unconventional monetary policy.
Asked by Swarbrick in the select committee whether he believed we were seeing growing inequality, Orr said: “Yes. The asset prices have moved.”
Orr later in the meeting again stressed: “Lower interest rates tend to mean higher asset prices, almost in a mechanical sense.”
Swarbrick went on to ask, “You’ve indicated in the past - it’s actually alluded to in this [January 2020] advice - those distributional impacts have to actually be addressed by fiscal policy in particular. Do you stand by that?”
Orr responded: “Yes… Monetary policy is incredibly limited in the longer-term structural type issues you’re talking about.”
Easier for the RBNZ than for a politician to act
After the meeting Orr told media he believed the Government was responding to soaring house prices.
“From everything I’m hearing, they’re hearing it loud and clear. It was eyes wide open going into this crisis,” Orr said.
“These are externalities that have happened, but the alternative was higher unemployment, a higher exchange rate, more people out of the labour, etc. So these were the difficult choices made in haste.”
Interest.co.nz put it to him that the “alternative” could’ve been the Government acting pre-emptively to mitigate the side-effects of unconventional monetary policy. This way the RBNZ could’ve achieved its employment and inflation targets with fewer negative externalities.
Orr responded: “I think really what you’ve got to is the core of the difference between monetary and fiscal policy and why, in a sense, monetary policy has been outsourced to an independent institution.
“Because it’s very very hard to turn on a dime and shift fiscal policy instruments around. People seem to be far more willing to accept the tax cut than the tax increase, or the relative changes.
“These are significant long-term settings that are being challenged - not just here, internationally. It’s the story of the decade.”
Here are videos of ACT Deputy Leader Brooke van Velden and Green Party Finance Spokesperson Julie Anne Genter asking Prime Minister Jacinda Ardern and Robertson questions in the House this week on the issues discussed above: