The Week in Politics: Fears grow over Reserve Bank's lending programme

6:00 pm on 20 November 2020

By Peter Wilson*

Analysis - Is the Reserve Bank courting disaster or simply doing its job?

Reserve Bank governor Adrian Orr.

Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas

Concern over the Reserve Bank's intention to pour billions of dollars of cheap money into the economy increased this week but there were sharply divided opinions on the impact it would have.

It's going to offer retail banks $28 billion at rock bottom interest rates through its Funding for Lending Programme to stimulate the economy. That will allow the banks to offer loans at rates even lower than they are at present.

The Reserve Bank won't put conditions on who borrows the money, and that's what is worrying the National Party because the property market is already red hot and prices have increased nearly 20 percent year-on-year.

National wants the government to "rein in" the Reserve Bank, something Prime Minister Jacinda Ardern has said isn't going to happen. She's opposed to any interference in the bank's independence.

Opposition leader Judith Collins told Morning Report: "This money is being created, it is there to supposedly keep the economy going but if the economy is nothing more than increased housing prices without increased supply of houses and increase to the productive sector, I say that's actually quite a recipe for disaster."

She called on the government to do better than "just cross their fingers and hope it's all good… I think this is actually a very dangerous situation".

National's shadow treasurer Andrew Bayly thinks ministers should tell the Reserve Bank about those concerns. "All I'm suggesting is that if the government is clear that we do not want to see rapid escalation of house prices, the Reserve Bank is smart enough to be able to work out the best policies to implement to make sure that doesn't continue to occur."

ACT leader David Seymour, who last week described Reserve Bank governor Adrian Orr as a risk-taking liability, suggested the price of assets such as housing should be included in the Reserve Bank's inflation targeting.

"At present the Reserve Bank is focused on keeping the price of frozen chickens, haircuts and petrol stable, they even consider the price of cigarettes, but they don't consider stable prices for assets," he said.

Former Labour finance minister Sir Michael Cullen had a bleak view of the Reserve Bank's intentions, saying in an article written for Stuff that it was proposing adding fuel to the "raging fire" of property price rises.

"The risk is that most of it will end up feeding the insatiable appetite of the property market," he said. "The alignment with what would seem to be the desirable objectives for government policy is hard to discern."

Business New Zealand chief executive Kirk Hope was on the other side of the argument. He said the government should stay out of it and lending decisions were best left to the banking sector.

Hope said some banks had already introduced their own loan-to-value restrictions on mortgage lending. "The clearly stated purpose of it (the lending programme) is to provide cheaper funding costs for businesses and consumers, and I think that's important right now."

Infometrics senior economist Brad Olsen said National was treading a dangerous path when it called for government intervention and the Reserve Bank was simply doing its job. "I'm not sure exactly how else we were supposed to try and bring interest rates lower to stimulate the economy."

Westpac chief economist Dominick Stevens had a similar opinion: "What could the Reserve Bank do differently? If they fail to reduce interest rates the consequence would be deflation and that would be worse."

Former Labour cabinet minister Richard Prebble had an interesting take on it. Writing in the Herald, he said that when he was minister of railways he found the weekly freight tonnage reports he received were a much better indication of the health of the economy than the data officials relied on.

That indicator was now the ANZ Bank's truckometer index, and it showed the heavy traffic index in October was 7.1 percent higher than a year ago. "Seven percent traffic growth is an economy roaring out of recession. There is no need for the bank to further stimulate the economy," he said.

The controversy around the Reserve Bank's programme spilled over into the housing shortage and the impact soaring prices have on first home buyers.

While National's "recipe for disaster" may not happen, the government still has a huge problem to deal with as house prices show no sign of slowing down.

Ardern said all options were being considered to help first home buyers and identified deposits as the hurdle.

"We're continuing to look at products that might assist with that," she said, and indicated that easing eligibility for the government's home start grants would be one way to help.

Newsroom's Sam Sachdeva wrote: "Even if she won't intervene with the Reserve Bank, Ardern and her ministers will need to develop some kind of meaningful solution on housing if she is to live up to her claims towards transformational government - and her party's grip on power."

Running a close second for media attention this week was cabinet minister Stuart Nash with his new tourism portfolio.

Speaking at the Tourism Industry Aotearoa conference in Wellington, Nash said it would not be "business as usual" for the sector in post-pandemic New Zealand and a reset was needed.

His perception of the reset was targeting the wealthy big spenders. "My ambition is that once global borders open, New Zealand is considered by the world's most discerning travellers as one of the top three places in the world to visit," he said.

Freedom campers aren't part of his scenario. "No longer will New Zealand communities tolerate the worst of our freedom camping visitors," he said. "I firmly believe that the low-spending, high cost tourist is not the future of our tourism industry."

He's going to ban freedom camping in vehicles that don't have toilets, they're going to have to be self-contained.

Stuff quoted his forthright comments from a Morning Report interview: "We get all these vans driving around at the moment that are not self-contained so if the driver or the passenger wants to go to the toilet they pull over to the side of the road and they shit in our waterways."

Nash sees benefits from the pandemic and the way Covid-19 has been controlled in New Zealand. "All our marketing effort will go into those high net worth individuals who are looking for a piece of paradise as they sit in lockdown in New York or London or Berlin or Paris and are looking at us with 30,000 people at a rugby game and going 'I want a piece of that'," he said.

If it works, the reset he's talking about could reap a bonanza. First, however, the border has to be re-opened and that's not going to happen soon.

Industry leaders praised Nash for his vision and enthusiasm but his focus on big spenders was questioned.

Eve Lawrence, general manager of Haka Tours, told Midday Report it was important to define what high value meant.

"A backpacker will come here, they'll spend months here, they'll work for a Kiwi Business, they'll contribute to tourism, they'll contribute to retail, they'll make a huge contribution to the economy," she said.

"A high net worth individual might come here for two weeks and contribute to tourism, do a few helicopter trips."

Lawrence thought Nash needed to be educated about the worth of the youth market. "They bring in, I think, around $1.5 billion."

*Peter Wilson is a life member of Parliament's press gallery, 22 years as NZPA's political editor and seven as parliamentary bureau chief for NZ Newswire.

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