Reserve Bank: tinkering with our rules won’t do much to revive investment

Sunday, 2 March 2025

The Reserve Bank has brushed off concerns from the Government and the Opposition that its own rules may be unnecessarily impeding business investment and economic growth.

Finance Minister Nicola Willis and her Labour Party counterpart Barbara Edmonds have both voiced unease over central bank rules that ultimately reinforce the incentive for banks to lend money to businesses at higher interest rates than they charge mortgagees.

But moribund business investment wouldn’t get much of a fillip from the Reserve Bank changing the rules surrounding the way it treats different forms of lending, the bank’s chief economist Paul Conway told The Sunday-Star Times during a wash-up interview on its latest monetary policy statement.

The cure for low business investment lay elsewhere, Conway suggested.

“I don't think that tweaking risk weights here and there is going to be anywhere near the game changer that's required to lift productivity and to lift capital intensity in the New Zealand economy.”

The Reserve Bank has appeared to oscillate in the level of concern it is voicing over declining business investment in the wake of publishing its first monetary policy statement of the year last month.

It noted business investment fell significantly in the three months to the end of September and said it assumed it would fall further in the near term, before picking up next year.

Governor Adrian Orr told the Finance and Expenditure select committee that if there was “a single variable” to worry about in its statement, it was that.

Business investment, along with government investment, was the “key to innovation, productivity and hence, potential growth”, he told the committee.

“We love our dividends. We love paying out any returns. We don't like firms reinvesting in themselves. We want the cash. That has to fundamentally change for us to lift long term productivity.”

But he indicated on the day of the monetary policy statement that the bank’s assumption was the recent trend it was observing was a “lag”, as businesses took time to respond to a nascent economic recovery.

“A lot of ‘high frequency’ data is saying investment will pick up. But it takes a lot of certainty to go and invest in a plant or farm or whatever it may be.”

Willis’ and Edmonds’ comments suggest they may be reluctant to wait for a pick-up in the speed at which business owners are reaching for their cheque books, however.

In a letter of expectations in December, Willis instructed the Reserve Bank to “review risk-weighting for lending”.

In September, Willis appeared to side with the Commerce Commission in a separate debate over the trade off between other aspects of the bank’s capital rules and competition policy.

The central bank’s risk weightings mean banks need to have more capital on hand to back each dollar of lending to businesses than each dollar of mortgage lending.

The policy is designed to reflect the assumption that some types of lending are riskier than others, but has the effect of pushing up interest rates on business loans when compared with mortgage rates.

The weightings have periodically been blamed for encouraging investment in property at the expense of more productive activities.

Willis said in her letter that it would be desirable for the Reserve Bank to consider how risk-weight settings affected “investment in a productive economy”.

In her most explicit comment, Willis said last month that changing the risk weightings the Reserve Bank gave to business and home lending to better support economic growth was worthy of consideration.

Edmonds also said the rules should be looked at, to encourage economic growth.

But Conway said the Reserve Bank’s policies were standard practice and its settings nothing unusual.

“I'd argue that risk weights don't have a huge bearing on the different interest rates faced by different sectors in the economy. The banks are well aware of the relative riskiness of their different loans across their books and charge different interest rates anyway.

“Twisting a prudential tool is not an efficient way of improving capital allocation in the New Zealand economy or improving competition within the banking sector either,” he said.

A problem remained, he acknowledged.

When business investment did recover, it would probably only be to a pedestrian level, he said.

“If you look at business investment in New Zealand as a share of GDP, it's a little bit below the OECD average — but not too far below.

“But our population growth over recent decades has been very strong compared to OECD average, so that additional capital is getting spread across more workers in New Zealand than it is in other countries.”

There was a lot that could be done to improve investment, Conway said.

“But it's much more about new technologies.”