Thursday's OCR hike was not needed, and penalises the rest of NZ for Auckland house pricing says BERL chief economist Ganesh Nana.
"We may be growing but we’re coming out of very deep recession, the rest of the world is still on its knees, we should be encouraging that growth even further rather than looking for phantom ghosts. [With inflation at] 1.6%, well within the band, and what we are experiencing, many parts of the New Zealand economy are actually experiencing deflation," Dr Nana told TV3's The Nation.
The Reserve Bank has signalled a 2% rise over the next two years, the economist said, characterising it as "quite a steep increase."
"The risks are that we put pressure underneath our exchange rate even more that increases our exchange rates, that makes imports cheaper so we’re rewarding consumers and that makes exporting a lot harder so we are penalizing those that are trying to actually earn us an income."
Dr Nana said interest rates were a "very blunt tool ... We’re supposed to be focusing on economy wide inflation…not just house prices, and not just house prices in Auckland. And actually the worrying thing, or the frustrating thing from my perspective is that we’ve been through this so many times before and yet that we still haven’t learnt as a country that we can’t control house prices through the blunt instrument of monetary policy. And that seems bizarre that we are penalising large proportions of the New Zealand economy and population because of problems in particular sectors or particular regions."
RAW DATA: Transcript
The Nation's Simon Shepherd interviews BERL chief economist Ganesh Nana, Real Estate Institute CEO Helen O’Sullivan, Co-operative Bank CEO Bruce McLachlan
Simon Shepherd: The Government has said that the bank is seeking to ensure its economic expansion can be sustained, Ganesh, that sounds quite sensible?
Ganesh (GN): it sounds quite sensible and that’s the model that we have been working with for the last 20 years, it hasn’t been that successful, but its playing by the rules that are in front of him and there is a perception out there that the economy is growing very strong and this means we need to increase our interest rates because of this phantom inflationary rate pressures.
Phantom, so you’re not really buying into that, you’re saying that its not that successful and that inflation is only about 1.6% and so its well within the target band and so its not needed yet?
GN: Exactly, yes we may be growing but we’re coming out of very deep recession, the rest of the world is still on its knees, we should be encouraging that growth even further rather than looking for phantom ghosts. As you say, inflation 1.6, well within the band, and what we are experiencing, many parts of the New Zealand economy are actually experiencing deflation, I'm not convinced.
So going ahead with this means, what are the risks?
GN: The risks are that we put pressure underneath our exchange rate even more that increases our exchange rates, that makes imports cheaper so we’re rewarding consumers and that makes exporting a lot harder so we are penalizing those that are trying to actually earn us an income.
Right, Bruce McLachlan as CEO of a bank, you are the person that passes on these rate rises. Do you think it’s necessary?
Bruce McLachlan (BM): Well the first thing I’d say is that I think that the reserve bank has an incredibly difficult job, because they’re not really trying to solve inflation issues for today, they’re trying to predict what they will be in 12 or 18 months time, so I think in the first instance, none of us are dealing with perfect information
But do we need them right now? I mean Ganesh is saying that its too early, that it’s a phantom target
I think the second thing is, it’s been the most signalled increase that I can ever recall, and so this rate increase is not a surprise to anyone, the market as a whole has largely agreed that we have to get into an interest rate cycle…increase at some stage, the current evidence would suggest that the economy had certainly been improving, and is quite strong and so we have to get onto that cycle at some stage
Do we actually have to get onto that cycle at some stage because it’s going to float through into house prices the meat and potatoes of everybody’s conversation? Do we really need this ?
Helen O’ Sullivan (HO): I guess, well Bruce’s point that it’s been well heralded, I think is a good one, I guess the thing that we are seeing at the moment is that the housing market is actually, in terms of the rate- the growth of sales is definitely slowing down. Probably, is this going to have an impact on the confidence of builders to come into the market and actually bring more stock into the market, which is probably the thing that we most need, to reduce house price pressure in the market.
Okay if we just look at it as a blunt tool for housing, we’ve got good price rises in Auckland and Christchurch…flat around the rest of the country- so the rest of the country is being punished for something that is happening in Auckland and Christchurch
(HO): That’s always a tricky one, I mean the reality is the reserve bank cant set a differential interest rate for Auckland and Christchurch compared to the rest of the country, now that I think is unavoidable. But it is true that we are certainly seeing a lot more price pressure in Auckland and Christchurch than we are seeing in the rest of the country, essentially outside of those two centres where you have real supply pressures, prices are actually relatively flat. And we’re seeing the volumes come off in those regional areas much more than in Auckland and Christchurch
Okay, so Ganesh we have flat house prices or volumes coming off in the regions, they’re going to have another hike there, it’s just going to hurt the regions even more, maybe job losses there?
(GN): Exactly and I think that reinforces the point, that we got we got a very blunt tool around interest rates, trying to do a lot of things and we’ve got to focus on interest rates or monetary policy, we’re supposed to be focusing on economy wide inflation…not just house prices, and not just house prices in Auckland. And actually the worrying thing, or the frustrating thing from my perspective is that we’ve been through this so many times before and yet that we still haven’t learnt as a country that we can’t control house prices through the blunt instrument of monetary policy. And that seems bizarre that we are penalizing large proportions of the New Zealand economy and population because of problems in particular sectors or particular regions.
Okay, this is going to be a very, ah, I mean we’ve already got home-buyers being left on the sidelines through the LVR restrictions put in by the reserve bank, now we’re going to have interest rate hikes, Bruce this going to be a killer for first time buyers isn’t it?
(BM): Um, well look, can I just go back to the previous point, because I don’t see that this interest rate rise was just about house pricing…. clearly it’s in response to the kind of broader issues that the reserve bank are seeing, potentially growing in terms of capacity constraints across multiple sectors, so…and I think…I look at this quite simplistically, if you go back to when the reserve bank took the interest rates down to the current level, which was back in 2008 and 2009 the world was in crisis a financial sector, we didn’t know if it was going to survive globally, we didn’t know what was going to happen, it was a totally different environment, we’re in a much, much more positive environment now.
This is good news, are you saying this is indicating good news?
Well it is, but I think that it’s becomes very difficult for us to say that we should keep interest rates where they were, when they were set in a crisis environment
Nobody else around the world is raising interest rates, and we need more growth, we need that stimulus for more jobs for more growth don’t we, we haven’t really got there yet?
No, well look the thing is, I think that we want to get on a sustainable track. What we don’t want to do want to do is be kind of fluctuating from boom, bust, boom, bust. That’s not what we want…a far more steady and sustainable pattern is in all of our interest I believe.
Okay lets just go back to the first home buyers issue, they are the people who perhaps are going to feel the pain of this aren’t they Helen?
(HO): I think all buyers are going to feel the impact of this to be fair, because looking at the reserves banks data around, the shape of the residential mortgage book, there is an enormous amount of that which is still, which is on fixed or floating or fixed for less than a year.
So those mortgages are going to come off, and its going to flow through quickly to people’s hip pockets? Is that what you’re saying?
(HO): Yes and I think that will have an impact on how far up the reserve bank has to go, You know I think, as Bruce says we are sitting in a position at the moment where, these rates were set at a crisis rate…certainly things have moved well up from there, and I guess the reserve bank is looking 18 months out as opposed to just right now
Now Ganesh in terms of consumer spending we are going to see this rate hype float through relatively quickly, because people are on floating or short-term fixed
(GN): Yes and we will have again though, a very regional impact because, I take issue with Bruce’s point around that we are now better than we were at the crisis point, maybe in New Zealand, and maybe in some sectors but that is definitely not across the board. And we’ve still got parts of Europe and indeed IMF suggesting that Europe might even be considering negative deposit rates, how anybody can suggest that we are past the crisis, when we’re facing that I don’t know and that’s the concern. We are growing yes, we may be having some capacity pressures in some sectors…but I really don’t see why then that should signal and say well, we’ve actually got to stop growing, or slow down growing…Which sectors are we suggesting that we should slow down? That’s my concerns
Bruce, what do you say…that this is just across the board that we’re doing well and so it’s okay to have the sustainable increase?
(BM): Please understand that I am not the Reserve Bank Governor, I don’t think that that career option is open to me. But look, I just look at it…you cant take what is a very macroeconomic tool and try and debate it at a microeconomic level because you could always come up with any number of stories, to say well you should or you shouldn’t do it…As I say, I stand back as the overall level of interest rate is now consistent with the economy and what we see today and what we expect it to be over the next year and in my view, its still too stimulatory for what the forward view is, and so a sustainable move up…a well telegraphed move up which enables borrowers to hedge their position is a good path for us to follow…
Do you see that as going to have an immediate impact on say, slowing down wage inflation and cutting jobs?
(BM): My personal view, a quarter of a percent in interest rates does virtually nothing.
(GN) Sorry, can I just jump in? It’s not a quarter of a point, I mean the reserved bank has signalled 200 basis points, that 2 percentage points over the next two years now that’s a quite steep increase…
So Ganesh and that’s going to have an impact on say, wage inflation? It’s going to bring wages down? Or slow the increase?
(GN): Well it’s not going to have a great impact on wage inflation because there isn’t any wage inflation, what it will have an impact on is as businesses plans about investing, investing in new equipment and machinery or in jobs and new markets, that’s what we’re cutting off at the knees, so you’re right, it won’t have an impact now or maybe even the next six months, but it will definitely slow us down over the next two years and beyond because we have this fixation that if we even look like growing a little bit too fast, we’ve got to stop when we actually should be encouraging us to grow the pie let’s make it bigger.