Reserve Bank should let government do the work
The Reserve Bank's next rate announcement is on Tuesday and the most powerful thing its Monetary Policy Committee can do to boost the economy now is nothing. The Monetary Policy Committee and governor Adrian Orr have signalled for months that the time has come for the Government to match extraordinary monetary policy with higher fiscal spending in order to fuel faltering growth.
Holding the overnight rate firm at 1 per cent, already a record and extraordinary low reached by a surprise .5 per cent drop in August, may well do more to promote this course of action than anything else the bank can do.
The Reserve Bank of New Zealand wouldn't be the first to test the power of doing nothing. Last week the Bank of Canada stuck by its 1.75 per cent overnight rate in the face of falling growth projections.
Reserve Bank governor Adrian Orr. Orr hasn't been shy about telling Finance Minister Grant Robertson it's time to loosen the purse strings.
Instead of pushing interest rates deeper into emergency territory and risk exacerbating household indebtedness, the bank sent a message to the newly elected government: over to you.
"There is a choice there about what pile of debt you want to increase," is the way senior deputy governor Carolyn Wilkins put it at a press conference.
The risk of dropping rates and promoting a renewed binge in household borrowing and house price inflation clearly weighs on the Bank of Canada. And at this point, it thinks the Government's relatively modest pile of debt can better handle an increase.
Households in New Zealand too are struggling under record debt. Their borrowing sits at over 164 per cent of disposable income.
While that ratio is even higher in both Australia and Canada, Sharon Zollner, chief economist at ANZ NZ calls that cold comfort.
She likens it to "an Aucklander with a million dollar mortgage looking at his neighbour with a $1.3-million dollar mortgage thinking, 'Well I'm alright.'
Even lower rates also discourage saving, and in so far as they pinch bank deposits, the main source of New Zealand loan funding, they may even curb rather than lubricate lending.
Households in New Zealand too are struggling under record debt. Their borrowing sits at over 164 per cent of disposable income.
While businesses are better placed to take on more debt there's little evidence that lower interest rates, already very close to zero, are any impediment. Other factors like labour and skills shortages stand in their way.
Government, on the other hand, is well positioned to step into the breach. New Zealand's net debt sits at a modest 19.5 per cent of GDP, a level economists say could rise significantly before it hits a threshold that would affect the country's credit rating. In addition, in the last financial year the Government accumulated a tidy $7.5 billion surplus.
Orr hasn't been shy about telling Finance Minister Grant Robertson it's time to loosen the purse strings. In a September speech at the NZX Issuer Forum, for example, he cited "government fiscal policy (taxes and public spending and investment)" as the first on a list of friends for central banks.
It's been a much echoed call among central bankers as they've pushed interest rates to their lower bounds and largely exhausted this conventional tool for spurring growth and inflation. Across the Tasman, Phillip Lowe, governor of the Reserve Bank of Australia, has also warned of monetary policy's limits.
He's dropped interest rates three times since June. The overnight rate is now just .75 per cent and with his firepower much depleted he's called on Scott Morrison's newly formed Coalition government to boost the economy with measures such as more infrastructure spending.