Reserve Bank of New Zealand Governor Adrian Orr has faced questions over what he did to pump up the housing bubble. Photo / Mike Scott
Reserve Bank of New Zealand Governor Adrian Orr has faced questions over what he did to pump up the housing bubble. Photo / Mike Scott
The Reserve Bank gave itself a pat on the back when it appeared for a regular grilling in front of MPs at Parliament's Finance and Expenditure Committee on Wednesday morning.
The Bank's Governor Adrian Orr noted that because of the Bank and the Government's actions, he could withdraw emergency economicsupport to get the economy on an even keel. The Bank continued that process yesterday, hiking the official cash rate 25 basis points to 1 per cent.
MPs on the committee were less sure of Orr's triumphalism, and an unlikely pairing of the Greens' Chlöe Swarbrick and Act's David Seymour quizzed the Bank on why there was so much inflationary pressure in the economy, and whether you can write-off the $215,000 increase in the meridian house price during the pandemic as an unintended consequence of the emergency economic support.
Swarbrick asked Orr about an admission from Treasury Secretary Caralee McLiesh that Treasury was now putting more emphasis on the role interest rates played in house price inflation, which was revealed in a select committee last week.
"One of the things we've learned over the course of the pandemic was the importance of interest rates to house prices, and so our modelling continues to be refined to give the best calibration possible," McLiesh said.
"We certainly were surprised by the really significant growth that we had during the pandemic," she said.
Treasury's new chief economist, Dominick Stephens, said Treasury had formed a new technical working group with the Reserve Bank and the Ministry of Housing and Urban Development for housing.
Stephens said the key conclusion of this group was that the "biggest driver of house price rises has been a large global decline in interest rates".
This is a big issue for the Bank, which is responsible for setting the official cash rate, the benchmark interest rate for retail banks.
When asked whether the Bank would shift its view like Treasury, Orr pushed, back saying he was already on the same page as Treasury.
He said the house price research had "clarified" differences between "global interest rate environments - things we don't have an influence over and domestic interest rates, relative to those global [rates]".
Global interest rates have trended downwards over many decades, pushing up the price of assets like housing.
Orr said the fact that New Zealand's housing market had taken off far more than markets overseas was because the lack of housing supply in New Zealand meant interest rates had a particularly powerful impact.
Chlöe Swarbrick reckons the Reserve Bank could have done more to prevent a housing bubble. Photo / Dean Purcell
"The outsize impact on housing has been because of a lack of housing," Orr said.
"Our monetary policy impact has had a very large and significant impact on housing because of the constraint on the ability to supply houses," Orr said.
"We have eased policy at a time when that particular market was constrained on the supply side."
Seymour picked up Swarbrick's line of questioning, noting that Orr must have been aware there was a lack of housing in New Zealand when he slashed the cash rate to 0.25 per cent in 2020.
"With respect, Governor, the constraints on housing supply were known when you made your decisions," Seymour said.
"Yes it was," Orr replied, but he added the bank does not "target house prices".
"We target consumer price inflation," he said.
Orr said that the fact that people used the cheap borrowing environment created by the Bank to go on a housing binge, was up to them, not the Bank.
Act leader David Seymour pressed the Bank on inflation Photo / Mark Mitchell
"We lowered interest rates to achieve what we have done. The fact people want to use that through buying and selling assets - that is the choice between them and financial institutions," he said.
Seymour asked Orr whether he might in hindsight, regret the amount of support pumped into the economy.
"You have to remember the alternatives," Orr said.
"What were we staring at the time we were staring at a global economy that had largely come to a halt, and a real concern for high and persistently high unemployment," he said.
Seymour pushed Orr on whether the Government was creating inflation in the economy by spending too much.
Orr said the Bank's "fiscal impulse" a measure of the amount of stimulus being pumped into the economy by the Government, was "waning". That would mean the Government's contribution to inflationary pressure was becoming weaker over time.
Annual inflation is currently 5.9 per cent - the Bank's target is to have inflation between 1-3 per cent, ideally close to 2 per cent.
"In other words, the bulk of the Government's fiscal impulse is behind us," Orr said.
"Although the level of spending remains high, the contribution of new spending starts to wane down from where we've been," he said.
Orr later said he was "very pleased" with the way the Government had targeted its stimulatory spending during the pandemic, which he said was "very effective", "unprecedented" and "very targeted to areas that monetary policy just can't get at".
Orr cautioned against the view that each dollar of new spending contributed to inflation equally.
"It's never just one for one, more spending equals more inflation pressure," Orr said.
Swarbrick asked Orr whether it might be an idea for the Government to take some heat out of the economy by raising the amount of money it took in tax.
Orr batted that question away, noting it was one for the Government.
"It's not for us to say what the Government's intentions are or aren't," Orr said.
ANZ was quick to pass on yesterday's cash rate hike to mortgage rates, raising floating and flexible home loan rates by 0.25 per cent to 5.04 per cent and 5.15 per cent.
