Borrowers getting benefit of lower rates, says Orr

Banks are getting the message and passing lower interest rates on to customers, says Reserve Bank governor Adrian Orr.

But he’d like to see them go lower. “We were concerned we weren’t seeing a [large] enough fall in retail interest rates given where wholesale rates have gone,” Orr told the Economy Hub in a video interview.

The Reserve Bank’s efforts to “jawbone” — or talk down rates — had seen them move significantly, he said.

In the past few weeks two-year fixed rates offered by the major banks have fallen as low as 2.69 per cent.

“We’ve been shouting from the rooftops — do not make this a credit crisis. This is not the GFC. The greatest way of creating a credit crunch is by suddenly retrenching,” Orr said.

Thankfully, the banks had been listening and the Reserve Bank’s bond-buying (quantitative easing) programme had also been doing its job to flatten the yield curve and keep rates low.

“But more is better,” Orr said. “It is in banks’ best interests to be passing on lower wholesale rates to their customers . . . their customers are the future earnings for the banks. They get that message now and that’s working its way through.”

Keeping interest rates low had been the Reserve Bank’s key goal since the start of the crisis in March.

The official cash rate was slashed to 0.25 per cent that month and the monetary policy committee committed to keeping it there until at least the end of the year.

A quantitative easing programme which gives the Reserve Bank scope to buy up to $60 billion in government bonds was launched to stop market rates rising. “That has been working,” Orr said.

Economists have been debating whether that

$60b limit will be enough.

Thus far the Reserve Bank had kept its options open but was likely to be in a position to give a clearer indication in August, Orr said.

“How much easing is enough is still to be determined. Both on size of economic challenge and how much more stimulus is needed and on how it is working.” Concerns have also been raised about the NZ dollar’s strength limiting export returns. That has prompted speculation that the Reserve Bank may act to bring it down.

The higher dollar was a case of New Zealand being “a victim of its success”, Orr said.

Being one of the few countries that has contained the pandemic meant traders were relatively more optimistic about our outlook and that had pushed the kiwi to around US65c.

“There is very little we can do about it,” Orr said. “Our balance sheet, as large as we like to think it is, gets lost in the wash of global capital.”

One possible tool would be to extend the bond purchasing programme to foreign assets — to effectively sell off kiwi dollars.

While that would help “at the margins” with the exchange rate, the primary motivation for any extension to the bond-buying programme would always be to control domestic interest rates, Orr said.

He acknowledged the risk that monetary policy which kept interest rates low for long periods could inflate the price of assets such as shares and property.

“That is a global challenge,” Orr said. “Without doubt, those who have assets generally benefit at times of very low interest rates.” In that sense the “haves” often saw wealth increases while the “have nots” might suffer lower nominal wages, he said.

That was a secondary impact of monetary policy but the primary impact was that demand stayed up and people kept their jobs, he said.

Dealing with those secondary issues wasn’t necessarily the job of monetary policy, said Orr.

He was pleased to see a lot more focus on fiscal support and stimulus in this crisis, which could address some equity issues.

“One challenge is we try and put the lessons we learned in the last battle to addressing the current battle and those battles are always different,” he said. “But we’ve got monetary and fiscal policy working far better. We know the limitations of monetary policy . . . and I think as a society we are much quicker to think about assisting each other.”