The new Reserve Bank remit
Changes are afoot at the Reserve Bank, but Harbour Asset Management’s Christian Hawkesby explains why investors shouldn’t worry
Calling investors in term deposits and fixed interest. Did you know that the way the Reserve Bank of New Zealand manages interest rates in this country is changing? Some investors may be worried, and that’s natural. But changes afoot at the Reserve Bank can be managed and even used to investors’ advantage in fixed interest funds, says Harbour Asset Management’s Christian Hawkesby. The changes at the Reserve Bank started in March with a new governor, Adrian Orr. The incoming government also announced a two-part review, which includes a change in policy targets. Phase 1 includes a widened Reserve Bank remit so that its actions must support sustainable employment. In the past it was charged primarily with targeting inflation. In addition, the most important decisions will now be made by a committee instead of the governor alone. Whilst the moves may leave some investors unsure of what the future holds, Harbour’s fixed interest fund managers believe the new remit, legislation and man in the hot seat will have a minimal impact on term deposit and mortgage rates, even if it takes the market a while to come to terms with the new order. Phase 1 provides a timely refresh, says Hawkesby. The current Act was written 30 years ago in an era of high interest rates. These days the pressure isn’t to bring inflation down, but rather to keep it well anchored around 2%. As an active fund manager Harbour can take advantage of volatility to boost returns to investors, Hawkesby says. Active managers do this by taking advantage of long-term investments if interest rates appear likely to fall in the future and conversely waiting in shortterm investments if rates look likely to rise and provide better opportunities later. “The other thing an actively managed fixed interest fund can do is employ better risk management and diversification,” he says. “Our managers do this by spreading the investments and keeping away from issuers we consider to be too risky.” Later in the year, Phase 2 of the review will kick off and could result in alterations to the Reserve Bank’s financial stability functions. In plain English, that could mean amendments to Loan to Value Ratio (LVR) restrictions, new Debt to Income (DTI) restrictions and other “macro prudential tools”. Whilst uncertainty at the Reserve Bank always has the possibility of spooking markets, the reality is that it’s normal for incoming governments to make some modifications, says Hawkesby. “Widening the roles of the Reserve Bank to also cover full sustainable employment has been a flagship policy of the Labour Party since the election campaign. The move isn’t unusual, bringing New Zealand more into line with other countries such as the United States and Australia.” What’s more, the new employment mandate doesn’t require any major policy adjustments in the near future, says Hawkesby. “The Reserve Bank has always considered issues such unemployment when setting interest rates, and the current jobless rate is very close to a sustainable level.” Nor should the shift in 2019 to a committee for interest rate decisions be a concern for investors, says Hawkesby. “It made sense 30 years ago for the governor alone to make these decisions when strong accountability was needed to get New Zealand inflation down to target from double digits,” says Hawkesby. New Zealand no longer has such a pressing issue. The new monetary policy committee will have external members, selected on the basis of having knowledge and experience in economics, finance, banking, or public policy. “The challenge will be balancing the broader wisdom of a group with the potential noise from diverging views and opinions.” Hawkesby says Harbour is expecting interest rates to remain on hold when Orr makes his first Monetary Policy Statement on May 10.
“Our managers give investors diversification by spreading investments around”