‘We can continue providing stimulus for a long, long time’
Despite the challenge facing New Zealand’s economy, Reserve Bank governor Adrian Orr remains confident we will get through this crisis together. Across a lockdown video link from his home, he told Liam Dann why
‘
We’re at the end of the beginning, we’re certainly not at the beginning of the end,” says Reserve Bank governor Adrian Orr, on the scale of the events facing the world.
“We’re still talking about nearterm triage.”
Even with massive support from the Reserve Bank and the Government, Orr is under no illusions about the upcoming challenges facing our banks — and the businesses that rely on them.
“They are going to have to make calls around illiquid versus insolvent,” he says.
The Reserve Bank is now working with the banks to make it easier to make those calls and minimise the need for business closures, he says.
“The catch-cry has been ‘confidence and cashflow’ and being a central bank we can assist on both fronts.”
But all businesses could not be saved, he warns.
“We know these are unusual times. But we don’t run a zero-failure regime here in New Zealand . . . some will go, some will struggle through with good assistance, some will flourish.”
A reshaping of the New Zealand economy in the months ahead now looks inevitable.
“You’ll see aggregation in some sectors, you’ll see new businesses coming to the fore . . . you’ll see ownership changes across business. It’s going to be a very dynamic period.
“I know we will come out of it, we’re a very smart people, we were very innovative going into this, we’ll be the same coming out.
“Keeping that cashflow and that confidence going is a critical role we can play at the Reserve Bank.”
The strength of the banking sector is key, Orr says.
Last year there was tension between the central bank and the Australian-owned commercial banks regarding the implementation of new rules requiring banks to hold more capital in reserve.
That appears to be largely forgotten as the two groups work closely together to navigate the crisis.
“Banks are critical infrastructure, they know their role in society,” Orr says.
“At the end of the day they are a business, they want to make a profit and we want them to be profitable. But at the same time, the holding of capital is exactly for times like this . . . to be deployed and used.”
They face a tough job in coming months, he says.
“They are going to have to be holding and allocating capital carefully, across the economy, to businesses that are as uncertain as everyone is. So they will have to make important judgments.”
The Government and the Reserve Bank had negotiated very quickly and successfully with commercial banks to bring in the mortgage holiday scheme, he says.
That would provide liquidity to households, likewise the Government’s new business finance lending scheme could provide a lifeline to many small and mediumsized businesses that had no other way to raise capital.
“We’ve opened up a term lending facility so the banks can borrow money from us in order to go off and do their lending,” Orr says. “So, another form of working together, making sure they can do their job.”
The banks have a reach into every business and household in the country — the Reserve Bank doesn’t, he says.
“On the monetary policy side we can continue providing stimulus for a long, long time. Interest rates are going to remain low for a long time and we’ve got various means to increase it if we need to.”
That could mean more quantitative easing (QE), it could mean taking interest rates lower still or even directly purchasing foreign assets through the exchange rate.
“We took interest rates to a new record low and said we’d keep them there for at least one year,” Orr says.
“We then started quantitative easing. The way we’re doing it is by buying government bonds off the banks so they can swap their holdings of government bonds for our cash. That keeps long-term interest rates low.”
“It provides liquidity for the banking sector . . . so they can keep doing their mahi and lending.”
The RBNZ has committed to up $30 billion worth of QE in the next year.
Where does that money come from?
It is effectively drawing down on New Zealand’s current and future collective wealth, Orr says.
“The Government, whenever it spends, it has to raise its own money through taxes and borrowing. Bonds are a form of IOU that the Government writes,” he says.
“People internationally will want to buy that . . . it’s a very low risk and good yielding investment.
“But it is borrowing and at some point it has to be paid back.”
While $30b is a big number in New Zealand dollar terms, it is very small in terms of global financial markets, Orr says.
“Given the great fiscal position the Government is in, there is an enormous amount of headroom for borrowing.”
That means there will be ongoing access to cheap money.
“We can continue to accept riskier assets on to our book, to provide that cash to keep the businesses going,” Orr says.
“Because we bank the banks, we can work closely with the sector, making sure that they can use their assets; that they can swap assets including government bonds for our cash . . . they keep doing their business.”
Yes, it will have to be paid back, he says.
“We’ve done that before. We’re starting from very low levels of debt and we’re heading back to, probably, more average levels of historical debt.”
Meanwhile, on the financial stability side there is now accelerated work going on about deposit protection, he says.
This was work that had been on the agenda and discussed publicly prior to this crisis but which was now being looked at again to give “people some comfort around that”.
In the medium term, there was still great uncertainty in the economy as the pandemic itself played out.
“Business is never going to feel confident until we have answers to that,” he says.
“I know the Government is moving into: how do you dismount from this lockdown, what are the signals, do you do it town by town, what levels of confidence do you need, what is critical infrastructure that just has to survive and will be financed.”
All of that work is going on, as well as much longer-term work on issues such as “how New Zealand could really benefit [by] coming out of this in a . . . strong global position”, he says.
“Being small and being isolated we stand a great chance of being highly successful.”
Right now the health issue is still number one, he says.
The enormity of it all could be overwhelming for people, but Orr says he remains highly confident of New Zealand’s ability to get through.
“We need to watch out for each other,” he says. “I have moments . . . but then you keep yourself busy. I feel very fortunate being fully engaged doing what we’re doing. So motivation is certainly not lacking, the confidence is strong.
“People just have to know that we are sitting here with the best banking system in the world.”
The governor says:
We don’t run a zero-failure regime here in New Zealand
. . . some [businesses] will go, some will struggle through with good assistance, some will flourish.
People just have to know that we are sitting here with the best banking system in the world.