Independence fight
Shamubeel Eaqub on a bank under pressure
The bells are tolling for our central bank’s independence. Bill English’s musings on how the RBNZ should pursue macro-prudential tools and for how long, is a departure from the norms of the past three decades that gave the RBNZ a fragile, but useful, state of independence.
That Pandora’s box has now been opened and the RBNZ should prepare for an ongoing assault on its independence from all parts of the political spectrum, and for its effectiveness in managing inflation and banks to wane, in years to come.
Independence has always been fragile. The RBNZ is a product of political will and is strongly influenced by it. Its current shape, its boundaries and goals have been set by politicians, but they have not set how it performed its duties. There has been a rough truce between political parties to leave the RBNZ largely alone.
The latest bout of interference on the RBNZ has its genesis in macro-prudential tools – namely lending restrictions. They were meant to protect banks from unsavoury borrowers.
The first lot of restrictions locked out young and poor home buyers, particularly first home buyers.
The second lot of restrictions locked out any speculators and investors from Auckland.
Since the Auckland housing market started to slow, the din against the restrictions have risen to a cacophony. Their charge: these restrictions are locking people out from buying houses and house prices may fall - which was the intent.
Worse, these agitators are wrong. Lending was disrupted, but did not slow because of these policies. After all, the policy only directed what share of lending should go to whom.
The amount of lending continued to grow at a breakneck pace. Some of those locked out borrowed from friends and families, and demand from those not locked out rose.
The more risk averse lending rules in Australia have also been passed on to New Zealand branches. Even if they are technically not branches, they are effectively run as branches.
Because of new New Zealand rules after the GFC, banks cannot borrow unlimited amounts of overseas capital, as they did in the 2000s. They need to balance their lending with domestic deposits. But deposit growth has slowed and they are near their limits of foreign borrowing. So, lending must slow in line with deposits.
It is not surprising that banks are lending less. And it has little to do with macro-prudential policies.
Even if the charge of macroprudential rules slowing house sales is wrong, the damage is done. The RBNZ’s macroprudential policies deliberately locked out some groups from accessing debt and homeownership, even if banks were willing.
In the past, banks did this rationing. No one likes bankers anyway, so it didn’t matter. But unelected bureaucrats at the RBNZ deciding who is a deserving borrower and who isn’t, have strayed dangerously into the realms of politics, with no exit.
When the RBNZ began the macro-prudential policies, it failed to paint itself an exit. Clear markers to say that when and why these restrictions will be lifted. In contrast, they did this with their exchange rate intervention policy, and people in the market understand when and why the RBNZ may dip in and out. But not with macro-prudential policy. It has not only engineered social policy, but it has no clear pathway to get out of it.
So, Bill English’s comments that he wants to see LVR restrictions eased did not come as a surprise. He and others will pooh pooh loan to income ratios, which would make our banks far less reckless.
Now that the National party, self-proclaimed ‘good’ economic managers, see fit to diminish the RBNZ’s independence, it will be open season for all political parties to weigh in without losing credibility.
The RBNZ’s failure to maintain inflation in the target range for the last decade will not help its case either. In nearly 60 per cent of quarters in the last decade, inflation was either below or above the RBNZ’s target range of 1 to 3 per cent.
The fragile illusion in politics that allowed the RBNZ its independence of the last three decades is now near its end. The ghost of finance ministers’ past may haunt our future.