Property investors will need a 40% deposit

July 19th, 2016 at 1:00 pm by David Farrar

The Herald reports:

Property investors will need a 40 per cent deposit under tough new restrictions revealed today.

The new rules are being urgently introduced in an attempt to put a lid on New Zealand’s spiralling property prices.

Reserve Bank Governor Graeme Wheeler has outlined the new rules this morning, and told banks they will be expected to act immediately.

The new loan-to-value ratios (LVRs) would take effect on September 1, but the Reserve Bank wants banks to “observe the spirit of the new restrictions” in the lead-up to the new policy.

The rules are:

• Restrictions for investor lending extended from nationwide from Auckland only
• Banks will be forced to require a 40 per cent deposit – up from 30 per cent – for at least 95 per cent of the loans they make in this area.

Home buyers
• Restrictions for owner-occupier lending extended from Auckland to nationwide.
• Required deposit level remains at 20 per cent for at least 90 per cent of bank lending.

It will be interesting to see how much impact this has. The large property investors may have enough capital that this won’t impact them greatly.

Mediaworks denied they were the leak

July 6th, 2016 at 7:00 am by David Farrar

Stuff reports:

New documents cast doubt on Newshub’s claim that it admitted leaking an interest rate decision before it was investigated.  …

However Reserve Bank Governor Graeme Wheeler had earlier briefed the central bank’s board that MediaWorks had had to be prodded into admitting the leak.

“MediaWorks conducted its own investigation and initially said they had found no leak,” the Reserve Bank minutes of March 17 read.

“However, after prompting from Deloitte, MediaWorks had searched again and found the emails containing the leaked information.”

The Reserve Bank declined to comment. MediaWorks has been approached for comment.

Doesn’t really help their brand, having an OIA reveal they were economical with the truth.

Should Reserve Bank Governors have to retire at 70

June 3rd, 2016 at 4:00 pm by David Farrar

Michael Reddell blogs:

Someone who has paid closer attention to some of the details of those provisions than I have pointed out to me recently clause 46(1)(c) of the Reserve Bank Act.    Under the provision, no one can serve as Governor, or Deputy Governor, once they are aged 70 or over.

This provision is quite old.  The legislation was passed in 1989, and life expectancy has increased by perhaps five years since then.  In addition, New Zealand legislation passed since then has prohibited compulsory retirement ages, unless they are specifically provided for in statute (as this one is).  There is a similar statutory age limit for judges.

I wasn’t aware of this provision and am surprised it exists.

You need an age limit for judges as they have a life-time appointment. But Governors are appointed to finite terms of up to five years, so why shouldn’t a 66 year old be eligible for a five year term?

The Act not only requires that no one can be Governor or Deputy Governor once they turn 70, but it also requires that first terms as Governor must be for five years.

There are, for example, two current and four former Deputy Governors who are still professionally active.

Peter Nicholl was Deputy Governor in the 1990s, before going on to serve as Governor of the central bank of Bosnia.  He is still apparently professionally active on the international central banking consulting circuit. But he is 72, and so barred from serving as Governor here.

Murray Sherwin succeeded Nicholl as Deputy Governor.  He is now chair of the Productivity Commission, and in many ways could be a very good Governor if he was interested.  But it appears that he is turning 65, probably next year, and so the age-70 limit could be a constraint.

Grant Spencer is a current Deputy Governor, and will have served in that role for a decade by the time Wheeler’s term expires.  Spencer has considerable experience inside the Bank, as well as decade in relatively senior roles at ANZ, but also appears to turn 65 shortly (the first academic publication I could find dated back to 1974).

Seems silly that such strong candidates are ineligible because they are now aged 65 or older.

Mediaworks broke Reserve Bank lockup rules

April 15th, 2016 at 10:01 am by David Farrar

The Reserve Bank announced:

An independent investigation has confirmed that highly sensitive and valuable market information on the March Official Cash Rate (OCR) cut decision was leaked by a journalist ahead of the official release, the Reserve Bank said today.

Following the investigation, the Bank will tighten its procedures for the release of confidential information.  The Bank will discontinue embargoed lock-ups for news media and analysts ahead of announcements of interest rate decisions, Monetary Policy Statements and Financial Stability Reports.

The investigation by Deloitte’s forensic unit found that, contrary to the rules of the lock-up, information on the Bank’s decision to cut the OCR was transmitted by a Newshub Mediaworks reporter to several people in the Newshub office from the media lockup for the Monetary Policy Statement on 10 March.

This information was then passed on by another person in Newshub Mediaworks, well before the MPS official release, to an economics blogger.

This is very bad behaviour by Mediaworks and I believe the fair thing would be for Mediaworks to pay for the cost of the investigation, rather than taxpayers.

Multiple staff behaved badly. In summary what happened:

  • A Mediaworks employee e-mailed a draft story an hour before the lockup finished to his colleagues. This was clearly against the rules. I have been in Budget lockups and you are told multiple times, and in writing, that you must not communicate with anyone before the lock up concludes. In an OCR lockup it is even more vital as currency markets will change on the OCR news.
  • The Mediaworks employees who got the e-mail discussed it amaongst themselves, instead of telling the reporter he should not have sent it to them early
  • Another Mediaworks employee overheard the conversation and for some reason decided to leak it to an economics blogger, Michael Reddell

The actions of the journalist in the lockup and the employee who leaked it to Reddell are appalling. Mediaworks should discipline them. Instead they won’t even name them.

Most media must know who was the Mediaworks journalist in the lockup. Why has he not been named? If it was say an analyst for a major trading bank who broke lockup rules, I’m sure their name will be in the media.

Finally this brings us ot the decision to end the lockups, I think this is regrettable. Lockups play a valuable role in allowing media and analysts to read the background to decisions, and write a more considered story. In an age where media compete to be the first to report the news online, lockups are even more valuable.

The better course of action for the Reserve Bank would be to ban Mediaworks employees from their lockups for say 12 months. Getting rid of the lockups punishes the innocent and will lead to a reduction in the quality of analysis of the Reserve Bank decisions.

Kiwibank censured by Reserve Bank

October 28th, 2015 at 4:00 pm by David Farrar

The Herald reports:

The Reserve Bank says it has issued a formal warning to state-owned Kiwibank for failing to comply with sections of the Anti-Money Laundering (AML) and Countering Financing of Terrorism Act.

In a statement, the Reserve Bank said it had “reasonable grounds” to believe that for various periods of time between June 30 2013, and June 2014, that Kiwibank did not fully meet all the requirements in respect to the following customer due diligence obligations under the act. …

The Reserve Bank said Kiwibank had not collected addresses of customers performing occasional transactions, as required by the act.

It also said Kiwibank did not always take reasonable steps to verify information relating to the source of funds or the wealth of the customer and did not consider terminating customers’ accounts in response to its ongoing non-compliance.

This is pretty serious stuff. I can’t recall the last time a major bank was formally censured by the Reserve Bank.

Brighter money

September 2nd, 2015 at 3:00 pm by David Farrar

The Reserve Bank has brightened up our bank notes.




This is the reverse of the $5 note. Great scenery.


This is my least favorite note aesthetically, but favourite monetarily!



I’ve noticed that ATMs now issues 50s not 20s.


Off memory the most common note.


Was this the inspiration for Princess Leia?


My favourite bank note.


Reserve Bank tightens bank credit for Auckland property investors

May 13th, 2015 at 2:00 pm by David Farrar

The Reserve Bank has announced three changes to its LVR restrictions:

In response to the growing housing market risk in Auckland, the Reserve Bank is today announcing proposed changes to the loan-to-value ratio (LVR) policy. The policy changes, proposed to take effect from 1 October, will:

  • Require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30 percent.
  • Increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.
  • Retain the existing 10 percent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 percent.

So the new rules will be:

  • 100% of property investors in Auckland will need at least a 30% deposit to buy property
  • 85% (was 90%) of home buyers outside Auckland will need at least a 20% deposit to buy a property
  • 90% of non investor home buyers in Auckland will need at least a 20% deposit to buy a property

I think the changes are sensible and better targeted. Those outside Auckland will find it easier to get a mortgage. Non-investors in Auckland will have no change (or may find it slightly easier as investors will find it harder), and property investors in Auckland will not be able to get financing unless they can cover 30% from their own reserves.

The Reserve Bank is consulting on its proposal, and if they proceed, will implement them on 1 October.

Politik notes:

Mr Wheeler said the Bank thought that the moves would reduce the number of property transactions in Auckland by 8 – 10% and possibly reduce house price inflation by 2 – 4% “MAYBE EVEN MORE THAN THAT”.

Conversely the moves would give a slight boost to the property market outside Auckland and Mr Wheeler estimated that sales there could pick up by about 4% and “maybe house price inflation by about one per cent.”

The RB move won’t solve the fundamental issue of not enough land in Auckland has been made available for housing, but it will help.

Once again, PM should not comment on Reserve Bank decisions

March 10th, 2015 at 3:00 pm by David Farrar

Stuff reports:

Prime Minister John Key has sent a shot across Reserve Bank governor Graeme Wheeler’s bows, effectively warning him not to keep interest rates unjustifiably high as inflation heads lower.

But Key stopped short of calling for an interest rate cut at the bank’s monetary policy review on Thursday.

He noted that while the bank had flexibility it should set monetary policy so that inflation returned to the midpoint of its 1 per cent to 3 per cent target band. …

Key said oil prices were coming down, the exchange rate was still reasonably strong and imported inflation appeared low. In light of that “it’s not an option for the bank to raise interest rates”.

That’s not a decision for the PM. While he is correct that there is no reason for interest rates to go up, he is the PM – not a financial commentator. It is a bad look to have the PM state that something is not an option for the Reserve Bank, because it can look like pressure on them to do as the Government wants.

The PM should not talk on where he wants the currency

September 30th, 2014 at 12:00 pm by David Farrar

Stuff reports:

The New Zealand dollar has slumped US1 cent after the Reserve Bank revealed a currency intervention of more than half a billion dollars during August.

But the Prime Minister says the currency remains far above ‘‘Goldilocks’’ fair value level of about US65 cents.

The kiwi dropped from US78.3c to US77.3c late this afternoon after new figures were released showing the Reserve Bank sold $521m of its New Zealand dollar holdings in August, a massive jump from July when it sold only $2m.

Economists said the central bank had put its money where its mouth was. The Reserve Bank was ‘‘shorting’’ the dollar when it was high and when it was expected to fall and would be happy with the latest fall, economists said. The scale of the intervention was seen as ‘‘material’’ and involved the most selling of the New Zealand dollar since 2007.

However, while the currency has fallen heavily this month, down more than US6c, it only dropped about US2c during August when the central bank was actually selling.

The kiwi had already fallen earlier today after Prime Minister John Key, a former currency trader, said the dollar was too high and the “Goldilocks” level (not too high or too low) would be about US65c.

“I happen to actually support the view that the Governor has that the exchange rate is over valued, so if they have intervened, it would be a matter for them, but it would seem fairly logical,” Key told reporters this afternoon.

I don’t think the PM should comment (even if in support) on decisions of the Reserve Bank Governor. I tweeted:

I would prefer if the Prime Minister did not think aloud about what the Reserve Bank should do.

Matt Nolan at TVHE blogs:

Given their standing and thereby ability to seemingly signal intervention in markets, the prime minister and finance minister really need to keep quiet about policy where there is an independent body involved – as it both creates volatility and indicates that such things are a more political issue.  I was pissed off when Cullen did this, pissed off when Key has done it in the past, and I’m pissed off hearing it now.  I don’t care if someone asked the frikken question, part of central bank independence is having fiscal authorities show a bit of discipline with their comments.

It is a bad precedent. We are lucky we have had strong Governors who can stand up to the Executive (as happened with LVRs), but we may not always have such people in the future.

OCR moves to 3.5%

July 25th, 2014 at 10:00 am by David Farrar


The good news for home owners with a mortgage, or aspiring ones, is that the indications are that there will be no further OCR rises for this year, at least.

OCR goes to 3.25%

June 12th, 2014 at 10:00 am by David Farrar


As widely expected, the Reserve Bank has lifted the official cash rate from 3.00% to 3.25%. To put things in context, I’ve graphed the level of the OCR from 1999 to today. It is still significantly below the early 2000s, let alone the mid 2000s.

What 0.25% means

March 14th, 2014 at 7:00 am by David Farrar

As was inevitable, the official cash rate went up to 2.75% yesterday. Having interest rates go up makes it hard for those with mortgages and increases the cost of borrowing for businesses. But the alternative is letting inflation get out of control, which really harms people on low and fixed incomes. High inflation will not in the long term lift economic growth.

If someone has a $400,000 mortgage 25 year mortgage, then an extra 0.25% on a say interest rate sees the weekly repayments go from $594 to $608 a week. So one increase doesn’t impact a lot, but many of them will.

2.75% is still a historically very low rate. In 2008 the ocr peaked at 8.25%. An ocr of 8.25% might see mortgage rates of 11.75% which has weekly repayments at a staggering $954 a week.


Danger Will Robinson, danger

October 14th, 2013 at 2:00 pm by David Farrar

The ODT reports:

However, Mr Cunliffe said today he had an “open mind” about whether the OCR should instead be set by a monetary policy committee.

He told TV3’s The Nation there were some good arguments for a monetary committee – including that a range of views would be on the table when decisions were made.

Mr Cunliffe said the matter was being considered by Labour’s shadow finance minister, David Parker, and any decisions would be signalled before next year’s election.

One point of detail to consider was whether the committee should have external members representing the likes of unions and exporters.

“If you had someone like a leader of one of the main business lobbies or a manufacturer or an exporter, then they would have a first-hand understanding of the impact of overvalued exchange rates on exporting, which is a critical issue for New Zealand.”

He denied a monetary committee would be a radical change, saying it would still make independent decisions subject to the objectives of the Reserve Bank legislation.

An internal committee would not be a radical change, and could be beneficial.

A committee where the Government appoints union mates to it, so they can gerrymander interest rates to give economic growth a short-term steroid type fix, is a radical change and absolutely undermines the independence of the Reserve Bank.

Is there anything off the table in terms of pay off for unions? Giving them a vote on setting interest rates is madness. Totally against that. Also against a business lobby having a vote on interest rates.

Saying such a move would leave the bank independent is Orwellian double-speak.

A key point the Greens gloss over

October 11th, 2013 at 2:00 pm by David Farrar

Russel Norman has blogged at Frog Blog:

The Treasury released papers last week recommending that the Reserve Bank move towards a committee structure for making future decisions on the Official Cash Rate (OCR). New Zealand is now alone in relying on a single person – the Reserve Bank Governor – to set the OCR. No other country in the developed world leaves such an important decision to one person.

Treasury gave the following reasons for why it supports the move to a board/committee governance structure:

Note the use of the term board/committee. The difference may seem unimportant, but it is not.

There are two seperate but related issues.

  1. Should the RB Governor solely determine the OCR
  2. If a group should determine it, is the group appointed by the Reserve Bank or appointed by Ministers of the Crown?

There are pros and cons for the 1st issue. You may lose the ability to hold the Governor accountable if he (or she) is not the decision maker, but as Treasury has pointed out there is greater security in shared decision making.

But even if you accept (1), the details of (2) are vital.

To re-ignite this important debate publicly, I’ve drafted new law in the form of a member’s bill to make this simple, uncontroversial change to the Reserve Bank’s governance structure along with the timely publishing of board minutes – another standard practice elsewhere in the OECD that improves the transparency of the Reserve Bank’s decisions.

Dr Norman’s bill would see the Reserve Bank Board set the OCR. The Board are appointed by Cabinet, and his proposal would allow Ministers to appoint people to the Board with a view to lower the OCR, even if it is inflationary, to help the Government out with a short-term growth issue. It would weaken the independence that we currently have.

The Reserve Bank itself noted in a review that in most countries with decisions by committee, the members are mainly internal. Dr Norman’s bill would see the decision made by external people only.

Treasury in their advice say:

There are several ways to construct a Committee; we are focussing on just using senior RBNZ staff to form the Committee to deal with concerns about conflicts of interest and difficulties in finding many experts to serve on the Committee.

An internal bank committee is a very different beast to the RBNZ Board which is appointed by Ministers. The Greens have tried to gloss over this key difference and make it look like Treasury are in support of their bill – which isn’t quite the case.

Having said that if Dr Norman’s bill is drawn, I would support it going to select committee. The issues are worth a parliamentary debate. I can be persuaded in favour of change – but not if the committee responsible for the decisions is the RBNZ Board, as that would be inappropriate and reduce the independence of the Reserve Bank.


Armstrong on Labour and Reserve Bank

October 6th, 2013 at 10:00 am by David Farrar

John Armstrong writes:

Not wanting to compromise the bank’s independence, Key had to accept the bank’s right to write the restrictions in its own terms.

Not so Labour. Cunliffe made vague noises about not interfering with the bank’s independence. But he intimated a Labour government would effectively instruct the bank to have regard for first-home buyers by writing that requirement into the policy targets agreement that a new government signs with the bank soon after taking office.

Cunliffe’s stance reflects his intention to give Labour a more bolshie image. He is exploiting the fact that Opposition parties can promise more than governments can. And he knows interest rates are likely to rise before the election.

But Cunliffe has to be careful. With Labour also committed to making the Reserve Bank take heed of exchange rate fluctuations, Cunliffe has to avoid leaving the impression that Labour’s answer to every economic problem is to fiddle with the Reserve Bank’s mandate – and thereby neutering the institution in the process.

I think it is clear the Reserve Bank will cease to be an independent entity under Labour. It will be back to the 70s.

Obsolete coins and notes

October 4th, 2013 at 2:00 pm by David Farrar

A reader, David Buckingham, has sent me a copy of an OIA request he made to the Reserve Bank asking how many obsolete coins and notes have they received in the last three years. The Reserve Bank will still take old currency, even when no longer legal tender. In fact a couple of years ago I did a clean up of old coins at my place and took them to the reserve Bank who direct credited the value to my bank account.

What is surprising is how many old notes and coins are out there. Here is the number of coins and note returned from 2011 on:

  • 1c coins – 142,276
  • 2c coins – 154,760
  • 5c coins – 1,789,596
  • $1 notes – 25,285
  • $2 notes – 41,330

But the RBNZ is still getting some pre-decimal currency is. They also have received:

  • 10/- notes – 167
  • £1 notes – 187
  • £5 notes – 188
  • £10 notes – 8

And some old coins:

  • Halfpennies – 7,080
  • Pennies – 13,352
  • Threepennies – 90,676
  • Halfcrowns – 31,320

Amazing how long old currency stays in circulation.

Reserve Bank decision making

October 3rd, 2013 at 2:00 pm by David Farrar

Hamish Rutherford at Stuff reports:

The Treasury lobbied for the governor of the Reserve Bank to be stripped of the right to solely decide on interest rate decisions, saying it created risk of “poor judgment”.

When Alan Bollard confirmed that he would stand down from the role last year, senior Treasury officials wrote to Finance Minister Bill English suggesting decisions on the official cash rate (OCR) should be made by a committee, rather than having the decision rest solely with the governor.

“Internationally it is usual to have a committee approach, with a range of possible committee structures,” senior analyst Renee Philip wrote last year, adding that the role of the Reserve Bank had broadened.

“The current single-decision-maker approach poses risks, such as a greater risk of poor judgment by a future governor than with a committee.

This is a worthwhile debate to have.

As I understand it, the Reserve Bank does have a committee that discusses the official cash rate settings, but it is advisory not decision making. One could have it as the official decision maker. It wouldn’t change the decisions, but would give some greater certainty. However it might reduce the accountability of the Governor, as he or she is the one who can be sacked if underlying inflation persist outside the agreed target range.

BNZ, Westpac, NZIER, Infometrics and Berl economists appeared to back the idea of a decision-making committee.

According to the Treasury, BNZ feedback was that a “committee internal to [the Reserve Bank] would ensure against risk of a future rogue governor”.

The Green Party said the advice of the Treasury aligned with its position.

No, it doesn’t. The Greens have said they want a committee to decide, but there is a key difference with Treasury advice. Treasury have said (and most international models are like this) that the committee should comprise senior staff of the Reserve Bank – ie be an internal committee.

The Greens want an external committee where they and/or sectoral interests such as unions, farmers and manufacturers have representatives on the committee. That has considerable danger.

Herald on Labour’s home loan policy

September 26th, 2013 at 11:00 am by David Farrar

The Herald editorial:

Labour’s new leader appears to think he can manage New Zealand’s financial system better than the Reserve Bank. If he was in power now, he says, he would not allow the bank to include first-home buyers in its mortgage lending restriction to take effect from next week.

The bank is about to limit the amount of lending that retail banks can do on deposits of less than 20 per cent of the price of the house. It is acting out of concern that banks are becoming too exposed to the risk that another house price bubble will burst, causing prices to fall. If that were to happen, the consequences for banks might be costly but for low-equity first-home owners it could be catastrophic.

The little equity they have amassed could be wiped out, leaving them owing the bank more than their house is worth.

If that sounds bad enough, other policies espoused by David Cunliffe would make their position even worse. If elected, he says, Labour would exempt first-home buyers from the new lending limits until its capital gains tax took hold and its low-cost house building programme took effect.

Nothing would be more likely to bring about a fall in house prices than a capital gains tax and an increase in state housing. If Mr Cunliffe had the interest of first-home owners at heart he would not only limit their access to low equity loans, he would do so well in advance of his other proposals.

So Labour is joining the Greens in promoting policies to leave home owners with negative equity!

When it announced the proposed restriction the Prime Minister made it known the Government wanted an exemption for first-home seekers. The bank was unmoved, pointing out that first-home buyers were about 30 per cent of low-deposit borrowers and they had to be included if the measure was to be effective.

John Key gave way, deferring to the bank’s expertise in its statutory jurisdiction. The bank’s so-called independence in these matters has been in the bedrock of New Zealand’s economy for nearly 30 years. In that time its independence has been respected by both major parties in government and when they were in opposition.

Labour’s finance spokesman, David Parker, believes the party could exempt first-home seekers without removing the Reserve Bank’s independence; his new leader appears not to care whether the bank’s role is compromised or not.

The independence of the Reserve Bank has been a critical element of our economy. We should be very worried about promises to over-ride its decisions by politicians.

Mr Cunliffe needs to be very careful in this area. As the leader of one of the main parties, his utterances could be damaging to long-term confidence in the economy well before he threatens to be in any position to act.

It is hard to believe he would carry out the promise to over-ride the Reserve Bank’s independence to exempt first-home seekers, if only because of the obvious risk to their equity. He was looking to score an easy political point.

Anything that makes it harder for first-home seekers to get finance is bound to be superficially unpopular, as proven by a poll at the weekend. Political leaders who withstand this pressure and respect the Reserve Bank’s independence deserve more credit for it than Mr Key has received.

Governments are all-powerful in this country, it would be easy to weaken the bank’s legislated jurisdiction and do untold damage to our economy.

Mr Cunliffe’s stance is a worry.

Basically Labour are campaigning on cheap and easy credit – the very thing that caused the global financial crisis. We should be very wary.

LVR restrictions

July 16th, 2013 at 11:00 am by David Farrar

Stuff reports:

The Reserve Bank is expected to forge ahead with controversial restrictions on home loans within the week – and there will be no exceptions for first home-buyers.

A banking source said banks were told on Friday to prepare for restrictions which will impose a 12 per cent ”speed limit” on their total new lending going on low equity mortgages.

That will effectively halve the amount of high loan-to-value (LVR) lending that the banks are currently doing, making it much harder to get a mortgage with a deposit of less than 20 per cent.

The source said the Reserve Bank’s restrictions were much more extreme than had been anticipated.

”My understanding is that all the efforts of Government to slow them down on the decision have not been successful,” they said.

Prime Minister John Key had previously suggested the Government would work with the central bank to agree on some sort of ”carve-out” for first-home buyers.

The source said tensions between the two parties had grown as Reserve Bank governor Graeme Wheeler refused to back down.

The Reserve Bank has consistently said that creating exceptions for first-home buyers, small business owners or others, would dilute the strength of the tool.

As an independent organisation, the Reserve Bank’s sole focus is maintaining financial stability in the banking system.

This policy, like most, will create winners and losers.

It should reduce pressure on house prices, as demand will drop following less credit being available. This will benefit those wanting to buy a home that can get credit.

The losers will be those who will be unable to get a mortgage as they don’t have enough of a deposit, and they will have to remain renting for longer. Also current owners could be seen to be losers as their houses won’t appreciate so much.

LVR limits have been widely criticised by the banking and brokerage industries, who have a vested interest in unfettered lending, as well as independent groups like Consumer NZ.

Even the Reserve Bank has admitted that people are likely to sneak around the rules by borrowing a deposit from family, or lower-tier lenders.

Once the limits are imposed, banks will cherry-pick borrowers with the best credit ratings, saving histories and account conduct.

If the reserve Bank does go ahead, it will be interesting to see how effective the policy is.

NZIER on who should set the cash rate

June 25th, 2013 at 2:00 pm by David Farrar

NZIER have published this note:

The Greens’ idea to use the Reserve Bank Board to make monetary policy might improve decision-making but using a board designed to represent industry, risks compromising the Reserve Bank’s independence and the goals of monetary policy.

So they’re saying collective decision making may be better, but not if those deciding are not independent.

Responsibility for monetary policy rests solely with the Governor of the Reserve Bank of New Zealand. Twenty-five years ago, monetary policy was tied to the neck of one person to maximise accountability for inflation targeting. Today most countries have adopted inflation targeting but use a board rather than a single person to set interest rates.1

Groups tend to make better decisions than individuals by using a wider range of information. That often leads to less extreme decisions.2 And decision-making by groups is more effective because members of the group contribute a greater variety of perspectives.3

I would note it can lessen accountability though.

Recently the Reserve Bank of New Zealand set-up an internal Governing Committee, comprising the Governor, Deputy Governors and an Assistant Governor, as a group to assist decision-making.

These innovations help the Reserve Bank form better decisions from a wide range of information and perspectives. That means the distinction between a single decision-maker and decision-making by a board is blurred by current Reserve Bank practice. 

So we expect better monetary policy from a board rather than a single person. But given the way policy is currently set these gains are unlikely to be large.4

In other words, the decisions are in practice collective ones.

Moving to a board structure has practical implications. We agree that like elsewhere in the world, releasing the minutes and voting record of the committee improves transparency.


But already New Zealand has a very transparent central bank. According to one measure, New Zealand ranks as the second-most transparent central bank globally.5 Publishing the board minutes is helpful but the Reserve Bank of New Zealand does not have a transparency problem. 

But let’s not pretend there is a huge problem.

It’s not clear what making the decision-making board more representative of the wider economy might achieve.

If the problem is improving decision-making, NZIER’s view is the Reserve Bank already receives considerable input from all parts of the economy as part of its regular information gathering process.

Including exporters and manufacturers on a decision-making board seems targeted towards a solving a different perceived problem: changing the objectives of monetary policy.

But good monetary policy is not about promoting exports: it’s about targeting inflation.
Ultimately, monetary policy is a technical activity. So any decision-making board needs the professional advice and experience of career economists that understand the economy.

Basically the proposal is an attempt to change the purpose of monetary policy by stealth.

Who should set the cash rate?

June 21st, 2013 at 7:00 am by David Farrar

The Greens have proposed that the Reserve Bank Board should set the official cash rate, not just the Governor. It’s a reasonable debate to have, but one that seemed familiar. I was sure the issue had been canvassed in the past as part of an independent review. I asked Don Brash if my recollection was correct and he responded:

David, you are almost correct. Cullen asked Lars Svensson to conduct a comprehensive review of the whole monetary policy framework. At the time, in 2000, Svensson was a leading monetary policy academic, at Yale from memory. Being Swedish, he had the advantage of being from a country regarded as “moderate” in political terms and, like New Zealand, a country very dependent on trade, with a floating exchange rate. He has since become one of the Deputy Governors of the Swedish central bank. 

He gave the New Zealand framework top marks, describing it as “world’s best practice”, but he did say that he thought that having all monetary policy decisions vested in the single person of the Governor was risky. (Fortunately for me, he said I had done a good job!) He suggested that instead monetary policy decisions should be taken by a small internal committee of senior RB staff – not by the board of (outside) directors because of the potential for conflicts of interest. Both the Treasury and the non-executive directors of the Reserve Bank recommended that New Zealand stick with the single decision-maker model because that makes it easier to pin the blame if monetary policy doesn’t deliver what the Policy Targets Agreement (the agreement between Minister of Finance and Governor) requires to be delivered.

It is a fair point, that if you make the decision a joint one by the Board, it makes it harder for there to be accountability for any failure in monetary policy.

Loan to value ratios

June 20th, 2013 at 3:00 pm by David Farrar

The Herald reports:

Prime Minister John Key was adamant yesterday the Reserve Bank and retail banks could find a way to exempt first-home buyers from proposed restrictions on low-deposit home loans.

At his post-Cabinet press conference, Mr Key said he supported the move by the Reserve Bank that would see banks limit how much of its new mortgage lending could be made on high loan-to-value ratios (LVRs).

He indicated any measures negotiated would be unacceptable if they penalised first-home buyers at the expense of speculators and property investors.

“Yes I accept absolutely and endorse the view that the banks should be forced to use this as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

I’m not so sure it is as easy as the Reserve Bank or the PM thinks. First let’s look at how big the “problem” is.



This data is from the five major NZ banks.

So the top three lines are all mortgages with LVRs below 80%.  They comprise four fifths of the total mortgages, and this was much the same in 2008.

There has been virtually zero growth in high LVR loans (over 90%) since 2008 despite there being solid growth in the housing mortgage market.

Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.

I think both the RBNZ are the Government somewhat over egging the problem and the need for LVRs.

We also have to be careful of the possibilities of unforeseen consequences. Restrictions on how much a bank can loan to home buyer may mean that they seek unsecured funding, rather than secured funding. This actually happened in Sweden, and actually works to decrease financial stability.

The proposed policies work fairly well in housing markets when there is an over-supply. But in NZ the problem is more an under-supply.

Reserve Bank intervenes in currency markets

May 8th, 2013 at 3:23 pm by David Farrar

NBR reports:

The Reserve Bank says it intervened in foreign exchange markets in an attempt to drive the kiwi lower. It gave no details of the size of the intervention.

The kiwi tumbled to 83.90 US cents from 84.48 cents before governor Graeme Wheeler’s comments were telegraphed at the finance and expenditure select committee in Wellington. The trade-weighted index dropped to 77.71 from 78.17.

The comments come after Mr Wheeler said in a briefing for the six-monthly financial stability report today that the currency was “significantly overvalued”.

“That intervention will not materially change the level of the exchange rate but could take potentially the tops off rallies,” Mr Wheeler told the committee. “In terms of activity, there’s been an intervention.”

The size of the bank’s action would show up on its balance sheet, deputy governor Grant Spencer told the same meeting.

This is an independent decision of the Governor. It has happened once or twice before. I am skeptical of the ability of the Reserve Bank to move the level of the NZ dollar in the long-term as our reserves are much smaller than others. However if they have correctly calculated that the currency is over-valued, then they may take the edge off the dollar without it costing taxpayers money.

As I have said previously, I think the issue is more the weakness of the US dollar and the Euro, not the strength of the Kiwi.

Lending rules

February 28th, 2013 at 10:00 am by David Farrar

Tracy Watkins at Stuff reports:

Rules aimed at taking some of the heat out of the housing market and providing greater financial stability could be agreed as early as the middle of the year, Finance Minister Bill English says.

Those rules are likely to include requiring home buyers to have bigger deposits.

Good for landlords as tenants will stay tenants for longer as they save for a deposit!

In a speech to a business audience in Auckland today, English said the Reserve Bank would consult over the next few weeks on proposals giving it a greater ability to influence the amount of lending done by banks and other financial institutions.

These might include requiring lenders to:

* Restrict high-loan-to-value ration lending in the housing sector.

* Hold additional capital on their balance sheet as a buffer during an economy wide credit boom.

* Hold additional capital against loans in specific sectors if risks emerge in those sectors

All well motivated, but my concern is unforeseen consequences.

ANZ chief economist Cameron Bagrie said the mid-year target date suggested “there’s been a lot more thought gone into getting monetary policy a few more mates”.

He was not a fan of rules on the loan-to-value ratio of mortgages, saying it was “akin to throwing a rock into a creek.

“You will find the water gets around the rock.”


Bagrie cautioned against action that might restrict the flow of credit, and said the criteria for using the instruments being proposed needed to be very clear.

He described the housing market as “frothy”, and doubted it was heading into bubble territory.

While some action was needed on the demand side if there was a desire to take heat out of the property market, action also needed to be taken on the supply side given the shortage of houses.

Absolutely. The supply side is key.

Graeme Wheeler

June 27th, 2012 at 10:00 am by David Farrar

James Weir at Stuff reports:

Reserve Bank Governor-in-waiting Graeme Wheeler was once touted as a potential World Bank president and gained fame for telling his boss, Paul Wolfowitz, to resign during what was seen as a civil war at the World Bank.

Wheeler’s appointment to take over at the central bank when Alan Bollard steps down on September 25 was welcomed yesterday, even though many had expected deputy governor Grant Spencer to win the top post.

Spencer may be disappointed and it is not clear if he will stay at the central bank, given Wheeler may serve at least one, possibly two, five-year terms. Wheeler has a strong international reputation, especially in world financial markets.

He takes over what is arguably one of the most important roles in the economy as the sole final decisionmaker on monetary policy: what to do with official interest rates and when.

I’ve only heard good things about Wheeler, and from all accounts he should prove to be an excellent Reserve Bank Governor. It is a very important role, and one that can come under considerable political pressure also.