Reserve Bank Governor refuses to answer questions

Michael Reddell at Croaking Cassandra writes about yesterday’s news conference with Graeme Wheeler, Governor of the Reserve Bank:

…the outgoing Governor of the Reserve Bank today both refused to accept that he’d made any mistakes, while refusing any comment at all on some of the more searching questions.

The news conference was on the occasion of the release of his statutory monetary policy accountability document, the Monetary Policy Statement.    It was the last opportunity journalists will get to question him.

And yet faced with questions about the Toplis affair (his use of public resources, including his senior managers, to attempt to close down critical commentary from an employee of an organisation the Bank regulates), he simply refused to comment.

I’m sure he is now feeling quite embattled and defensive, but surely it should be unacceptable for a powerful public official to simply refuse all comment on such a chilling example of abuse of executive office?

I hope members of Parliament use their opportunity this afternoon to ask questions on this matter, and to insist on answers.


The Governor also tried to avoid most questions about his term in office (but was happy to provide a long answer to a curious question about risks around North Korea, on which he has (a) no accountability, and (b) no more knowledge than the rest of us).  Apparently there is a speech coming –  which may be interesting, but it provides no opportunity for follow-up challenge or scrutiny.   Asked if his critics have been fair, and if at times their criticism may have clouded his judgement in decisionmaking, he claimed he will cover that in his speech.  If so, that should be interesting.      Asked also about:

  • what surprised him about the economy in the last five years,
  • about his inflation record in the last five years, and
  • what his successor should worry about

he refused to provide any answers, and simply referred everyone to the forthcoming speech.

Odd that Wheeler had a media conference before giving his speech.

A lot more about the failure to answer questions and about Reserve Bank matters in: Consistent to the end…..sadly

Inflation down to 1.7%

Inflation over the last quarter was flat and the annual rate has dropped from a recent high of 2.2% to 1.7%.

RNZ: Inflation slows to 1.7 percent

The consumer price index (CPI) was flat in the three months ended June, slowing the annual inflation rate to 1.7 percent from 2.2 percent, Statistics NZ said.

A fall in fuel costs and airfares offset higher prices for household basics such as food, rent, and power, while the housing boom lifted the price of a new house.

One of the main drivers of the lower annual rate was cheaper telecommunications products and services.

The relative strength of the New Zealand dollar also helped dampen inflation by making imported goods cheaper.

Housing rentals rose slightly (up 0.4 percent), held down by a 1.6 percent fall for Canterbury.

Prices for newly-built houses, excluding land, rose 1.8 percent this quarter.

Seasonally lower domestic airfares (down 14.5 percent), lower petrol prices (down 1.9 percent or and average 4 cents a litre), and seasonally lower prices for car rentals contributed most to a drop in overall transport costs.

Higher vegetables prices pushed food inflation up 0.7 percent in the June 2017 quarter to 2 percent for the June 2017 year. Vegetables prices rose 19 percent for the year, with higher prices for lettuce, kumara, and broccoli.

The inflation numbers were below market expectations and Westpac acting chief economist Michael Gordon said that would dampen any notion of interest rate rises by the Reserve Bank in the foreseeable future.

Good news for people with mortgages and other types of loans.

Lack of wage growth is not so good for wage earners.

Inflation since 1990:

Inflation up to 2.2%

After years of very low inflation the latest 12 month CPI inflation (year to end of March) has risen to 2.2%, with nearly half of that in the last quarter. CPI inflation of 2.2% in year to March beats expectations, with housing-related and transport prices on top of cigarette tax rise driving it

Prices rose at their fastest rate in five years during the last 12 months as housing-related costs such as new builds and rentals, transport costs and a cigarette tax hike helped push up the cost of living.

Consumers Price Index (CPI) figures released by Statistics NZ showed an annual increase of 2.2% in the year to March 2017. This was above market expectations of a 2.0% rise. CPI inflation in the March quarter was a whopping 1.0%, adjusted for seasonal effects.

This was significantly above expectations by the Reserve Bank in February, but most of the jump is due to two things, petrol, and cigarettes and tobacco which were bumped up by an increase in excise tax.

The cost of house building and rents were also a significant factor.

Indeed, there was a catch in Thursday’s figures. Excluding the impact of petrol, cigarettes and tobacco, the CPI only rose 1.5% during the year to March 2017.

Tradeable prices (imports and local goods and services in competition with imports) rose 1.6% over the year, its highest since September 2011. Non-tradeable prices (such as newly built houses and other goods and services that do not face foreign competition) rose 2.5%.

Inflation is still quite low and well within the range the Reserve Bank is supposed to try and keep it.

This might put pressure on the Official Cash Rate but economists predict that is unlikely to go up again until well into next year.

ASB economists said they still expected the next OCR increase to come in late 2018. “We expect the current lift in headline inflation will be temporary, as does the RBNZ, given there were several ‘one-offs’ in Q1,” they said. “Nonetheless, we expect annual inflation to hover around 1.5% and 2% over the next few years.

So it’s a bit unusual compared to what we’ve had over the last few years but it doesn’t seem anything to get very worried about.

Government stalling on housing

Housing has been a major and growing problem for the Government, and their lack of action in trying to stem escalating prices has been one of the biggest legitimate criticisms of them.

And Finance Minister Steven Joyce appears to be stalling further because it is election year.

Stacey Kirk: Facing a firing squad, what’s left to do but stall?

An old advertisement used to run on TV, in which a man facing firing squad asks for a Pixie Caramel as his last request.

In the extended time it takes for him to down that long chew, his shooters fall asleep and he scales a prison wall – evading consequence for as long as he can outrun the inevitable chase that follows.

The man facing firing squad is Finance Minister Steven Joyce, and his Pixie Caramel is a cost-benefit analysis of debt-to-income ratios (DTIs).

That doesn’t look anything like Joyce but you get the picture.

The Reserve Bank wants another clip on its tool belt to apply DTIs – a restriction which would limit how much banks could lend to people, based on their income.

The move is intended to avert a personal debt crisis that could occur if buyers continue to borrow large amounts to get a foothold in a rampant housing market, but become unable to service their debt once interest rates start to rise.

But the collateral damage would likely see a saw cut through the bottom rung of the housing ladder.

Thousands of first home buyers would be priced out of the market, many on incomes where a cap on what they could borrow wouldn’t be able to buy a one-bedroom home in Auckland – a city where $1 million is now the average house price.

“Not in my election year, you don’t,” Finance Minister Steven Joyce has effectively told Reserve Bank Governor Graeme Wheeler.

He has manoeuvred to divert the Reserve Bank from undertaking the controversial housing measures in an election year, by asking them to carry out a cost-benefit analysis and public consultation for the measure before he agrees to give them the ability.

The greater good versus political priorities in election year?

And while Joyce’s move may be cynical, it does show a sure-footed approach to political management and exactly why Joyce has doubled repeatedly as National’s go-to campaign manager.

He managed a National disaster in the Northland by-election campaign.

Stuck against a brick wall with a crosshair aimed between his eyes?

In election year, Joyce doesn’t want the headache.

What’s more important, Joyce’s head  or the New Zealand property market?

With a risk of stuffing housing even more and also bombing in the election.

OCR lower, mortgage rates higher

Most local news was overshadowed by the aftermath of the US election yesterday, but the Official Cash Rate was reduced to a record low of 1.75%. This was signalled and expected.

However mortgage rates have not followed suit, in fact some have started to rise.

ODT: OCR cut, but lower mortgage rates unlikely

As expected, the Reserve Bank cut the official cash rate to a record low 1.75% yesterday, with expectations the country’s stubbornly low 0.4% inflation rate will rise to the midpoint of its 1%-3% target.

The quarter point cut is not expected to be passed on in lower mortgage rates by banks, which are having to borrow money offshore at higher rates, partly because of the lack of deposits domestically.

Mr Wheeler said his current projections, including yesterday’s cut, would see economic growth strong enough to have inflation settle near the middle of the 1%-3% target range.

“Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

On the question of the OCR being cut, but not passed on to mortgage borrowers, BNZ external relations consultant Mac Dalton said it was timely to remind borrowers that interest rates were not solely linked to the OCR.

One source of funding for banks is local deposits, and at present there were more people wanting home loans than there were people saving, Mr Dalton said.

“So to encourage and attract more deposits, people’s savings and terms deposits, we need to pay a sharper return to savers,” he said.

Also the banks still needed overseas funds to fill the gap, and the cost of those funds remained volatile, he said.

So while it looks like mortgage rates are unlikely to be coming down any further we still benefit from record low rates.

Human error correction doubles inflation

After discovering a ‘human error’ Statistics New Zealand has adjusted the inflation rate for the year to September, doubling it to 0.4%.

Stuff: Rego error at Statistics NZ doubles inflation, complicates life for Reserve Bank

Human error has been blamed for a mistake in official figures about the cost of living, creating a new headache for the Reserve Bank on whether to cut interest rates.

On Monday morning Statistics New Zealand blamed a “manual processing error” for its decision to correct its estimate of the increase in inflation in the year to September, from 0.2 per cent to 0.4 per cent.

The mistake related to how much the agency believed the cost of licensing a small car – commonly referred to as registration or ‘rego’ – had dropped in the September quarter.

I’m surprised that one mistake on one class of car registration makes that much difference.

This change may complicate this weeks Official cash rate annoiuncement.

Although the correction may appear minor, and inflation remains below the official target, it adds weight to the arguments against the Reserve Bank lowering the official cash rate (OCR) on Thursday to a new all time low of 1.75 per cent.

Most bank economists were already questioning the need for a further cut even before the correction was announced.

“I still think the Reserve Bank shouldn’t be cutting rates,” Bagrie said.

“If it were me, I’d be biased towards holding [the OCR at 2 per cent]. But I think [the Reserve Bank’s] forward guidance has been so strong that they’re going to find it hard to step away [from cutting].

I’m not sure what difference it will make whether the OCR is lowered or not as banks have already indicated that mortgage rates are likely to go up anyway due to international rates.


Negligible inflation

The latest Consumer Price Index shows inflation at a negligible 0.2% for both the past quarter and the past year (to September).

This remains outside the Reserve Bank target range of 1-3%, as it has been for the past two years.

With mortgage interest rates at record lows many people will be benefiting from price stability, except for those wanting to enter the inflated housing market or having their rents pushed up.

Some see problems with ongoing low inflation rates but it’s a lot better than the days of rampant inflation.

Reserve Bank attacks housing

The Reserve Bank has published a ‘consultation paper’ that proposes a significant increase in property lending restrictions but is also encouraging banks to act quickly on their ‘proposals’.

This may be related to a predicted further drop in interest rates.

This is just one of a range of attempts to clamp down on escalating property prices.

Reserve Bank consults on new nationwide investor LVR restrictions

The Reserve Bank has today released a consultation paper (PDF 1.2MB) proposing changes to loan-to-value restrictions (LVRs) to further mitigate risks to financial stability arising from the current boom in house prices.

“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength.  The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.

Under the proposed new restrictions:

  • No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).
  • No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
  • Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

These proposed new restrictions would take effect on 1 September 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.

Mr Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy.  Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country.  A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.

“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.

“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Consultation concludes on 10 August.

Mr Wheeler said that the Bank is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”

Low inflation continues

Negligible inflation continues with the latest quarterly rate being 0.4%, and that is also the last 12 month rate.

This is a bit lower than expected and increases the chances of further interest rate cuts with the next announcement on that due on Thursday.

ODT: Inflation lower than expected

Statistics New Zealand noted higher petrol and housing-related prices were countered by lower prices for meat and domestic air fares.

Petrol prices showed the largest upward contribution, up 5.3% for the quarter, which followed declines in December and March of 7% and 7.7% respectively.

Housing and household utilities prices rose 1% for the quarter, influenced by higher prices for newly built houses, excluding land, which was up 2.1%. Electricity was up 1.8% and rentals for housing were up 0.6%.

Meat prices, down 2.7%, made the largest downward contribution for the quarter, followed by domestic air fares, down 9.9%. Domestic air fares have fallen 14% since the December 2015 quarter.

Inflation to June 2015 was also 0.4% (it went down 0.5% in the December quarter), down from 1.6% from 2014.


This hasn’t been updated with the latest quarter yet but shows the trend.

Very low inflation and record low interest rates (which are expected to drop further) means expenses are relatively low for people with mortgages, but those wanting to buy, first home buyers in particular, will be finding it tough with house price inflation continuing to run very high.

Inflation from 1920:


Those wanting to return to the good old days pre ‘neo-liberalism’ should consider the inflation rates through the 1970s and 80s.

Reserve Bank speech

Reserve Bank Deputy Governor Grant Spencer  gave a speech to Wellington Branch of the New Zealand Institute of Valuers tonight. He said that a range of factors had contributed to strong demand for housing, including record low interest rates, rising credit growth, and population increases.


New Zealand is experiencing a housing market boom. House prices are increasing at 13 percent per annum nationally, and at 15-20 percent in Auckland and close-by regions. Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction.

The Reserve Bank is mandated to promote the soundness and efficiency of the financial system. Our concern is that a severe housing correction would pose real risks for financial system stability and the broader economy. The banks are heavily exposed to housing with mortgages making up around 55 percent of total assets. Household debt, at 163 percent of household income, is at a record level.

Many domestic and international factors are contributing to the strength of the market. The current record low interest rates are a world-wide phenomenon linked to post-GFC caution and very low inflation in the global economy. Also driving local housing demand has been an unprecedented net migration inflow over recent years reflecting New Zealand’s stronger economic performance relative to many other advanced economies.

While strong demand has been underpinned by low interest rates, rising credit growth and population increases, the housing supply response has been constrained by planning and consenting processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints. The resulting housing market imbalance has been exacerbated by New Zealanders’ on-going preference for investment in bricks and mortar over financial investments, due in part to the ready availability of credit and a tax system that favours debt funded capital gains.

Given the complexity of factors underlying the housing situation, there is no simple policy solution. We need to tackle housing on many fronts. The key challenge in the long run is to expand housing supply to meet the growing demand. The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel.  The Bank’s interest rate policy is targeted primarily at keeping future CPI inflation between 1-and-3 percent on average over the medium term, although it must also have regard to the soundness and efficiency of the financial system. The Bank’s other relevant instrument is macro-prudential policy. This can improve the resilience of banks’ balance sheets on a lasting basis and help restrain credit and housing demand, at least for a period.

He then went into detail on:

  • Initial loan-to-value (LVR) restrictions
  • Recent worsening of housing imbalances

The he talked about a broad policy response being needed, and outlined the role the Reserve Bank can play.


In conclusion, the Reserve Bank is concerned about the risks to financial and economic stability inherent in the growing housing market imbalances. Auckland pressures are re-emerging following an easing in the market from late 2015, and house price inflation has accelerated in a number of regions.

The causes of the imbalances are complex with a number of important drivers on both the demand and supply side. Addressing these imbalances will require policy action by a variety of agencies on a number of fronts. The underlying housing shortage needs to be urgently addressed, particularly in Auckland where population growth continues to outstrip housing construction. A step up in supply is required and finalisation of the Auckland Unitary Plan will be a key opportunity to facilitate such a step.

On the demand side, the key drivers are population growth and easy credit. The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income. Residential investors are accounting for an increasing share of house sales and new mortgage credit.

The Bank’s interest rate policy must have regard to financial stability concerns, but the global environment is likely to keep interest rates low for some time yet. Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes. In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.

In short, it’s complicated with no easy or quick fixes.

Full speech: Housing risks require a broad policy response

Media release: Housing risks require a broad policy response