Treasury is defending the way the Government is supporting New Zealanders, as low interest rates contribute to ballooning house and share prices.
Chief Executive and Secretary to The Treasury, Caralee McLiesh, told interest.co.nz the Government’s response to COVID-19 aligned with advice Treasury and the Reserve Bank (RBNZ) provided Finance Minister Grant Robertson in January 2020.
They advised the Government may need to respond to the side-effects of “unconventional monetary policy”, should these policies be used - which they since have.
They said the impact of quantitative easing or large-scale asset purchases “may increase wealth inequality by more than conventional monetary policy [IE changing the Official Cash Rate] by raising asset prices more directly”.
Treasury and the RBNZ categorised this as a “significant” trade-off, but noted using new monetary policy tools would also support those at the edge of the labour market. In other words, lower debt servicing costs and more liquidity in financial markets support businesses, which keeps people employed.
Asked by interest.co.nz in June 2020 when he was considering the side-effects of low interest rates when designing fiscal policy, Roberton said no.
Unemployment has since remained relatively low, but house prices have soared and bank lending to businesses has declined.
Asked whether Treasury repeated its January advice throughout 2020, or changed tack and told Robertson a response to the side-effects of loose monetary policy was no longer warranted, McLiesh said: “What we have seen is that both monetary and fiscal policy have been working in tandem to do some heavy lifting to support the economy - monetary policy working through broad base credit channels and also supporting lower debt costs; fiscal policy working with more targeted mechanisms to make sure that those who are most affected by the pandemic are also provided support.
“So I think that what has happened over the last year is consistent with that advice.”
McLiesh defended the Government’s decision to not act sooner to prevent house prices sky-rocketing. The Government is this week expected to unveil a set of policies to cool the housing market.
“Pretty much all forecasters at the start of the pandemic thought that house prices and other asset prices would be falling - Treasury included,” McLiesh said.
“So we have been surprised by the extent to which interest rates have driven up house prices. But there have been other factors as well.”
McLiesh acknowledged low-skilled workers, youth, women, Maori and Pacifica had been disproportionably affected by the pandemic.
She also recognised low interest rates benefit borrowers, asset owners and those at the edge of the labour market, and disadvantage savers and those trying to buy assets like houses.
But she said the net effect of very loose monetary policy was unclear and complex.
“To understand that question, we need to understand how housing wealth is distributed across households,” McLiesh said.
“We do know New Zealanders have an enormous amount of wealth in housing - around 60%. We know that those who are in the lowest wealth deciles tend to have less housing and assets. But we don’t know the full wealth distribution of housing. And until we really look at that sort of assessment, we can’t tell the impact on overall wealth inequality.”
McLiesh said Treasury was doing work to assess this.
She said a UK study showed a 10% rise in house prices led to less wealth inequality because housing wealth was concentrated among middle-income earners.
She also made the point: “It’s even more complex to understand what the impact would’ve been without alternative monetary policy and without other types of policy as well.”
Part two of this interview will be posted on Monday.