Q+A Grant Spencer interviewed by Corin Dann

Acting Reserve Bank Governor says interest rates are set to stay low

This week, in a rarely-granted interview, acting Reserve Bank Governor Grant Spencer sat down with our political editor Corin Dann and cast the net forward, looking at a continued period of low interest rates, capital gains tax and even a bitcoin economy.

With interest rates remaining low, Mr Spencer admits the Reserve Bank potentially has less “leverage over inflation” by adjusting CPI, but says the different LVR policies have gone some way to combat that.

“Interest rates can’t be used to head off a housing boom. We’re concerned about the risks in the financial system. And so those risks are going to increase if you’re going to have big booms and busts in housing. We’re trying to moderate that,” he said.

When asked whether he believes capital gains tax should be introduced, Mr Spencer points to the Government’s announcement on the bright-line test being extended from two to five years.

“I think it has had an impact already – just the announcement of it. And so that’s helped to reduce the investor interest. That’s been one of the big drivers of why the Auckland housing has come off over the past year.”

This week we’ve seen the price of bitcoin skyrocket, and analysts debating its future as a serious currency. Mr Spencer believes cryptocurrencies “are a real, serious proposition for the future”, but may come in a different form than bitcoin.

“A cryptocurrency that has a more stable value will be the sort of cryptocurrency that’s more useful for the future,” he said.

Q + A
Episode 40
GRANT SPENCER
Interviewed by CORIN DANN

GRANT I don’t think it is putting us out of a job; I think it’s really just, sort of, slower reactions. And we’re not really sure whether these are temporary slow reactions or more permanent, but we need to evolve and change our framework as these conditions--

CORIN But it’s significant, isn’t it? Because if our economy, for example, was to go into recession or it runs too hot, we need that tool that you have – the Official Cash Rate – to deal with that. But what you seem to be saying is that our ability to deal with domestic problems or good problems in the economy is reduced. Is that what we’re going to have to deal with?

GRANT Well, I’m saying it’s having less, potentially, leverage over inflation. Monetary policy can still be having an impact on output, employment, the exchange rate etc. So one of the things I was saying is that it may be appropriate for us to actually be more flexible in our targeting of inflation and take more account of some of the changes in some of those other parts of the economy, such as output and employment.

CORIN So what does that mean for, for a start, borrowers? Are we looking at a situation, if inflation is more stable, lower for longer, that this environment we’re in of low interest rates is going to stay?

GRANT Low inflation means low interest rates, and, yeah, if low inflation stays longer, low interest rates will stay longer. That’s correct.

CORIN So does that also mean a big underpinning for a housing market that is still very overvalued, in particular in Auckland?

GRANT Well, that’s one of the problems we’ve had, really, over the past 10 years – certainly, the past five years – where low CPI inflation means that we’re having to keep policy rates low, but that’s been a stimulus for asset prices and, in particular, housing. And this has happened in every other country as well. And so we’ve had these issues with escalating house prices and risks to financial systems.

CORIN So what that means, right, is you can’t raise interest rates to cool off the housing market any more.

GRANT No. We can try—We have regard to, but you’re right, because the main target for our monetary policy is CPI inflation. So interest rates can’t be used to head off a housing boom, and that’s why we moved to introduce macro-prudential policies to help us out on that front.

CORIN This is your LVR lending restrictions and the debt-to-income ratios which you’ve asked for, right?

GRANT Yeah, well, back in 2013, when we set this up, we have a toolkit with a number of instruments in it. LVRs are the main one, and that’s the one that we implemented, as you know, in 2013. We’ve had different versions of that over the past three or four years.

CORIN Would it just be easier if--? Instead of the Reserve Bank, an unelected body, having to delve into issues of affecting how much a first-home buyer can borrow, wouldn’t it have just been easier for the government to bring in a capital gains tax or actually deal with those issues rather than leave it to an independent body?

GRANT Well, there are two aspects to macro-prudential policy. One is the macro part, which is, like, macromanagement, and that’s part of our game in terms of monetary policy – macromanagement. The other is prudential, so the other main responsibility we have is prudential management. So these tools are mainly about trying to reduce risk in the financial system.

CORIN And this is the banks lending too much to people, people taking on too much debt? That’s what you’re talking about here?

GRANT That’s right. We’re concerned about the risks in the financial system. And so those risks are going to increase if you’re going to have big booms and busts in housing. We’re trying to moderate that. We’ll never stop it, but the macro-prudential policies are aimed at moderating those cycles.

CORIN Let me put it another way, then. Now that we’re in a period where house prices have flattened – certainly in Auckland, if not the rest of the country – and this government is going to look at the tax issues, wouldn’t it make sense for them to put in a capital gains tax? Would you like to see a proper capital gains tax so that you don’t have to worry so much about the macro bit that you’re talking about?

GRANT Well, the tax treatment of housing is very relevant, and we’ve called for more appropriate tax treatment of housing in the past, because housing has been a tax-favoured investment. And so the new government is proposing to shift out the bright-line test from two years to five years. That’s effectively a capital gains tax on housing, so in that sense, that’s one thing that will help to head off further escalation in house prices from the investor side of things.

CORIN Does it need to go further, though? That’s my question. Anything more?

GRANT Well, you know, we’re not tax experts. I think that will have an impact. I think it has had an impact already – just the announcement of it. And so that’s helped to reduce the investor interest. That’s been one of the big drivers of why the Auckland housing has come off over the past year.

CORIN Is it your role to think about equality? Because one of the things that came through in your speech was that wages have clearly not risen greatly, that they are suffering because of some of these global forces you’re talking about but also some domestic factors as well. Yet, with borrowing costs so low, people able to invest in the sharemarket and assets, they’re doing very well. Is there an equality issue around your thinking?

GRANT Distribution equality, that is not part of the Reserve Bank’s mandate. Our mandate is about price stability and about financial stability, and that’s what we can do. We have instruments to address those objectives. We don’t have a mandate for economic distribution, income distribution or wealth distribution. That’s the job of the government.

CORIN Even if your policies affect it, though? Even if the policies that you’re setting may affect it?

GRANT Yeah, all those policies that we have will have some impact. I mean, we move interest rates up and down. They have an impact. You increase an interest rate, it improves the well-being of a saver, but it’s tougher for the borrower. So there’s always some impact in what we do. But that’s inevitable. That’s not our prime purpose. We have to run those instruments, addressing our objectives. We talk to the government, and we consult with the government on everything we do. We have operational independence with monetary policy, but, certainly, those financial policies in macro-pru, there’s a lot of consultation with government, and they will give their input, which will take into account some of those distribution effects.

CORIN Do you feel as though you are getting that independence that you need from the government? There have been clearly tense periods over the last few years with the loan-to-value ratios and the implementation on them, because some would argue that is encroaching on areas where an elected official should be making those decisions. You have asked for debt-to-income ratios, which go a lot further and are a lot tougher. I guess some of the signals coming from Grant Robertson and Steven Joyce are they’re not that thrilled about those ideas.

GRANT Well, we recognise that those instruments, while the prime purpose is financial stability, do have these other effects. And that’s why we don’t have pure operational independence on those instruments, like we do with interest rates, for example. So when we brought in the LVRs in 2013, we were consulting very carefully with the government, and if the government had said, ‘Don’t do it,’ we wouldn’t have introduced those instruments.

CORIN That would’ve been a pretty big move for a government to make – to stare down a reserve bank – though.

GRANT Well, there was a lot of debate at the time, and each of those moves we did in 2013 and 2015 and then again last year, there was a discussion with the Minister of Finance and other ministers. And so they recognised that housing was an issue and that there was risk building up and that these instruments were actually appropriate.

CORIN Going back to the issue around the Official Cash Rate, the main headline, I guess, instrument that people really know, what happens if we get into another big shock, another big global financial crisis? We don’t seem to have a lot of ammunition up our sleeve, and if you’re saying that these global factors are having a bigger and bigger influence on New Zealand, we seem to be losing control.

GRANT Well, the nature of control changes, and new instruments are introduced when conditions change.

CORIN What would some of those new instruments--?

GRANT But you’re right; there’s less headroom. Official Cash Rate’s at 1.75%, and, of course, rates in most other countries are lower than that – in advanced countries. And that’s why they’re getting a bit nervous, because if they have another big recession, then, yeah, there’s limited scope to ease policy.

CORIN So what does New Zealand do if there was a big drought?

GRANT Well, we’re a small, open economy, we’re subject to the weather, and we have to wear those shocks. Things like monetary policy can soften the impact a little bit, but at the end of the day, the farmers and other businesses have to tough it out through those sorts of shocks.

CORIN Some commentators – Bernard Hickey was one – seemed to infer that your speech was suggesting that maybe you even start to look at new mechanisms that are, say, used in Singapore – which, interestingly, was suggested by Winston Peters – whereby you use the currency, the dollar, to set your local inflation and interest rates. Is that actually realistic?

GRANT Well, what I was saying is that increasingly, a lot of industries in New Zealand that were sheltered and had some degree of monopoly power are increasingly open, where prices and wages have driven, basically, what’s happening in global markets rather than domestic conditions. So the more open the New Zealand economy--

CORIN And we’re thinking things like Uber and whatever else?

GRANT Yeah. Yeah, all of those online activities and other things. And just the increased mobility of labour can make some of our industries, such as education, for example, or health, in becoming more part of a global industry rather than just a local, protected industry. The more that happens, then the more that we become price-taker – we just take it; prices and these things are set in the rest of the world. And what I’m saying – in that situation, the exchange rate becomes a relevant instrument or indicator for monetary policy to have an impact on inflation, which, as you say, is essentially the Singaporean model. But that’s an extreme case, but if things are moving in that direction, then the exchange rate becomes more relevant.

CORIN So that’s a problem or an issue for future governors, perhaps , to start seriously thinking about?

GRANT Potentially. If these trends continue. If these trends continue. But I don’t think we’re going to be there any time soon.

CORIN You have started a little bit of work on the likes of Bitcoin and the new wave of online currencies. How significant is that? We hard this week, of course, that Bitcoin’s valued at the same as the New Zealand economy now -- $270-odd billion. Some people think it’s a bubble; some people think it’s the future. What do you think?

GRANT It looks remarkably like a bubble forming to me. We’ve seen them in the past. Over the centuries, we’ve seen bubbles, and this appears to be a bit of a classic case. But how far up--? With a bubble, you never know how far it’s going to go before it comes down.

CORIN A bubble, perhaps, but is there actually—are we looking at a, sort of, dotcom bubble, where the first round was the bubble but the second time was the actual, sort of, gains that people foresaw? Is it the future?

GRANT Yeah, I think the digital currencies, cryptocurrencies, are a real, serious proposition for the future, and I think they are part of the future, but not the sort that we see in Bitcoin. Bitcoin is, to me, very much like gold. It’s mined; it has a fixed quantity; and the price is very volatile. I thin k a cryptocurrency that has a more stable value will be the sort of cryptocurrency that’s more useful for the future. To be a useful currency, it has to be stable value in terms of facilitating payments as opposed to just a speculative instrument, like gold or like Bitcoin.

CORIN Grant Spencer, we have to leave it there, but thank you very much for your time.

GRANT Thank you.

Please find attached the full transcript and the link to the interview

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