Reserve Bank governor Adrian Orr acknowledges concerns it is 'widening wealth divide'

Wednesday, 2 September 2020

Reserve Bank governor Adrian Orr says unemployment, not house prices, is his highest concern.

Reserve Bank governor Adrian Orr has acknowledged, but brushed off, concerns that the bank’s stimulatory monetary policies are favouring the wealthy.

Orr said it was the prospect of persistently high unemployment “rather than house prices” that was keeping him awake at night.

“Could low interest rates simply result in ever-higher asset prices, benefiting their owners but widening the wealth divide?

“This is an issue that we have been thinking about a lot. There is a perception that the Reserve Bank’s actions only benefit those with assets,” he said.

The Reserve Bank has acknowledged the argument that low interest rates are favouring the wealthy.

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“However, job security and a predictable household income have the most immediate and beneficial impact on economic wellbeing.”

The biggest assistance the bank could provide was to prevent deflation and persistently high unemployment, he said.

In a cautionary address to Victoria University’s school of government, Orr warned the “scarring” of economic confidence caused by the Covid-19 pandemic could reduce the ability of the Reserve Bank to lead the economy towards recovery.

The “longest lingering impact” of the pandemic might prove to be on confidence, he said.

“Most challenging is the downside bias to the economic risks, given the ‘scarring impact’ the uncertainty has on people’s willingness to spend, and on businesses’ preparedness to invest and employ.”

Orr reiterated that the bank was preparing additional steps to stimulate the economy.

These could include cutting the official cash rate below zero, “further quantitative easing” and providing cheap lending to banks, he said.

But he stressed monetary policy had limitations “during a shock of this nature” and the impact of the steps it was preparing on economic activity was not certain.

“The impact of monetary policy will ultimately depend on whether it inspires people and firms to change their investment and consumption intentions,” he said.

“Banks are awash with liquidity but we can’t force them to lend.”

Likewise, the Reserve Bank could not force people to borrow, he said.

New Zealand went into the crisis in a good economic position but what it had endured had been unsettling, he said.

“Vulnerabilities include our reliance on services with face-to-face interaction such as hospitality, tourism and education.

“We also have a high reliance on global demand and trade, including in some relatively low margin and/or low productivity industries where we are a price-taker.

“And there is a high level of indebtedness in some sectors – including primary production, commercial property, and household balance sheets,” he said.

Credit ratings agency S&P has warned that the New Zealand and Australian economies are likely to face “more pain” from the pandemic in the months to come, questioning whether the worst is still to come.

It forecast many Australian and New Zealand companies would face “significant damage” over the next few months and some might never fully recover.

“The fallout from the pandemic has yet to fully play out across the Australian and New Zealand corporate landscape,” credit analyst Richard Timbs said.

“We believe more pain is likely in companies' earnings amid the weakest macroeconomic environments in decades.”