Evidence 'inconclusive' that lower interest rates are increasing inequality, says Adrian Orr

Wednesday, 2 December 2020

Reserve Bank governor Adrian Orr said it was “nice to get mail”, referring to a high profile intervention by Finance Minister Grant Robertson.

About 20,000 more people would be unemployed if the Reserve Bank hadn’t reduced interest rates in the wake of Covid, the central bank’s governor Adrian Orr says.

Delivering a lecture via Zoom to the Australian National University in Canberra, Orr said the bank had begun researching whether looser monetary conditions increased or decreased income and wealth inequality, but said international studies were “inconclusive”.

Orr delivered the speech in the shadow of a letter from Finance Minister Grant Robertson that noted low interest rates could increase house prices and sought views from the bank on ways to address that issue.

An unapologetic Orr said his speech was not intended to be the bank’s response to that letter, but gave no indication during it that he felt the bank had got any balance wrong.

“It is always nice to get mail,” Orr said in a seemingly light-hearted reference to the high-profile ministerial missive that was not included in the prepared text of his speech released on the Reserve Bank’s website.

Judith Collins and David Seymour grill Jacinda Ardern on housing.

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“Our actions assisted the New Zealand economy to remain on track to experience low and stable consumer price inflation, a lower unemployment rate than otherwise, a New Zealand dollar exchange lower than otherwise, and ongoing financial stability,” he said.

Unemployment in the September quarter was 5.3 per cent, or 151,000, according to Stats NZ.

But Orr said the bank had estimated it would have come in at 6 per cent “in the absence of our recent monetary policy actions”.

Those actions, which include a $100 billion quantitative easing programme, had been effective to date in supporting both inflation and employment “as intended”, he said.

In an apparent further sign the bank would not be easily deflected from its current policy settings, Orr said its “legislative mandate and operational independence” had put it in good stead to act swiftly and with confidence to buffer the economic impact of the virus.

Restricting access to credit is the main way the Reserve Bank can curb house prices, but that shuts people on lower incomes out of the market, Adrian Orr says.

Orr acknowledged New Zealand had a “challenge” with house prices, saying they were “sitting in the top three globally”.

But he reiterated the bank’s view that “many other factors” other than monetary policy were influencing that, saying the key factors were supply and demand.

“A historic undersupply of housing and restrictions on land supply are two widely acknowledged issues.

“More recently, with the impact of Covid, employment prospects have also tended to remain more positive for the traditional home-owning age group, compared to youth,” he said.

“And Kiwis who were living overseas returned home in the early stages of the Covid pandemic, and fewer have left since, hence more housing demand.”

Orr also implied there was a degree of irrationality among investors in focusing on housing.

“A lot of it I’d say was because of a ‘portfolio choice’ rather than some kind of underlying economic value – people will say ‘I want to put all my dough there’.”

Where the bank could “be of most use but again with trade-offs” was with its prudential regulatory tools, he said.

But while the bank could influence house prices by restricting access to credit, that could make it “harder for first-time buyers or lower-income people to ever actually get into a home”, he said.

Orr said the bank would continue to research the impact of monetary policy on inequality.

But the fact lower interest payments supported employment, made net borrowers better off, and reduced the income on savings were all factors pushing in the opposite direction to raising asset prices, he said.

“Of course, none of these observations are reasons for a government to be unconcerned, or for policy makers to not carefully analyse the data,” he said.