If you've got money in the bank, real interest rates are negative - and not likely to get better soon. Photo / 123RF
If you've got money in the bank, real interest rates are negative - and not likely to get better soon. Photo / 123RF
OPINION:
For depositors unhappy at the negative real interest rates banks offer them these days, Reserve Bank governor Adrian Orr's message boils down to this: too bad. Get used to it.
The takeaway from Wednesday's monetary policy statement is that the dashboard reflecting current conditions is pretty good, but theroad ahead is foggy.
Uncertainty is rife, caution is necessary and "considerable time and patience" will be required before the Reserve Bank can be confident it can dial back its current stimulatory monetary settings.
The collateral damage from those settings extends beyond would-be first home buyers priced out of the housing market, to savers as well.
It is true that the bank cannot do precision monetary policy. Its tools are all blunt.
But the trouble is, the bank has been much more effective at engineering lower deposit rates than lower borrowing rates.
Over the past 12 months, two-year mortgage rates have dropped a full percentage point but six-month deposit rates have dropped 1.8 percentage points, to 0.8 per cent. That is a negative real return, given inflation expectations one year ahead of 1.8 per cent, not to mention being taxable.
The hit to deposit rates is a deliberate artefact of monetary policy, most particularly of the funding for lending programme (FLP). It offers the banks funding from the Reserve Bank at the official cash rate, currently 0.25 per cent, and which the monetary policy committee has just indicated it is still willing to take negative if need be.
"A key channel of the FLP's effectiveness is the indirect channel. That is, the availability of the FLP puts downward pressure on other sources of funding such as term deposits," the monetary policy statement says. "This reduces bank funding costs, irrespective of whether banks actually draw on the FLP."
The committee wagged an admonishing finger at the banks, saying it expects to see a full pass-through of lower funding costs to borrowing rates and would closely monitor progress. It said the same thing three months ago, for all the good it did.
Over the course of 2020, term deposits with the banks fell by $25 billion or 13 per cent but at year's end they still funded more than a third of the banks' collective loan book.
It remains to be seen how long that continues, as the purchasing power of those deposits slowly evaporates.
Unfortunately, it reinforces the message which has been blaring at New Zealanders from the tax system for a generation now: if you want to provide for your old age, don't save money, borrow money.
Ever since Sir Roger Douglas changed the tax treatment of retirement savings vehicles, the message has been that if you save they will tax you every step of the way.
Better to borrow and use the money to bid up the price of housing. Then sit back and enjoy the benefits of leverage in an almost-always rising market.
Enjoy your untaxed imputed rents if you are an owner-occupier, or your interest deductions if you are a landlord, until you sell and pocket your tax-free capital gains.
It remains unclear to what extent, if any, the Government is willing to address those distortions.
It is, however, quite happy to benefit from the low borrowing costs it faces as a result of the central bank's willingness to buy its bonds as fast as it issues them.
But when house buyers take advantage of the same low rates, it is willing to scapegoat the bank, by implication, with its new injunction to take account of house prices when — independently of course — setting policy.
Reserve Bank governor Adrian Orr. Photo / Mark Mitchell
Orr bridled at the suggestion that the negative real returns to money in the bank are reinforcing the message that saving is a mug's game and contributing to the rush to invest in rental properties instead, fuelling house price inflation.
"When interest rates are low people may look further along the risk/returns curve for higher returns if they think they need that," Orr said. "But they have to understand they are not just moving further along the return curve but further along the risk curve as well. We are saying do that with eyes wide open."
"Whenever people think about investing, they tend to think about the house. But there are more options for investing that have similar risk and returns and probably more longer-term productive implications."
House prices, like any asset, can under- or over-shoot fair value, Orr said. "We will be very clear about when we think house prices are creating financial stability risk and we are ready to act, as we have proven with our recent loan to value ratio [moves]."
People tended not to think about the risks involved in property investment, he said.
"There are many challenges: keeping your tenants, all the requirements you have as a landlord. Equity markets and other forms of investment have their relative returns and risks as well."
New Zealand has a rather puny sharemarket which intercepts relatively little of the country's economic life. So should investors look offshore?
As for global equity markets, as Orr acknowledged, there is increasing talk — echoing concerns about the housing market here — that they are overvalued, as a function of low interest rates.
"That is the world we live in," he said. "There is no free lunch."
