Prime Minister Christopher Luxon visiting India before China could be seen as an insult in China, Beijing-based New Zealander David Mahon says. But he says China's recently announced strategic partnership with the Cook Islands, through which NZ was kept in the dark, shouldn't be viewed as insult to, or provocation of, NZ.

Mahon, who is Managing Director of Mahon China Investment Management and has lived in China since 1984, spoke to interest.co.nz in a new episode of the Of Interest podcast.

Luxon, who before the 2023 election said achieving a free trade agreement with India would be a major strategic priority for a National government, is set to visit India next month. He's yet to visit China as Prime Minister, but is expected to do so this year.

"If the Prime Minister had gone to China and conferred upon it as a great power the respect it deserved in the last year or so of his tenure, it'd be fine. But it's almost a statement of a diplomatic insult not going to China before going to India," Mahon said.

He said potentially the prospects for NZ products in China over the next two to three years are very good, with China retaining a great need for protein, wanting to buy seafood, and NZ logs still selling reasonably well.

However, Mahon suggested after a good relationship with China for many years, highlighted by the 2008 Free Trade Agreement (FTA), NZ is now seen as "a country of diplomatic infidelity."

"And for most of my life, we've been the opposite of that. Under Helen Clark, John Key, Jim Bolger, we were the country that was respected. Now people are scratching their heads and saying, what's wrong with New Zealand? It seems to have lost its sincerity, its sense of loyalty."

The recent signing of a China-Cook Islands comprehensive strategic partnership, which the NZ Government was kept in the dark over, shouldn't be viewed by NZ as an insult or provocation from China, Mahon said. The Cook Islands is a self-governing state in ‘free association’ with NZ with its citizens having NZ passports.

"...what China is determined to do is to make sure that it retains this relationship with New Zealand, although New Zealand is struggling in many ways to hold up its end."

"We shouldn't be too peevish that they [the Cook Islands] want to do a deal with someone with more money than us," Mahon said.

"In the end, China is going to invest throughout the Pacific, where it can. Part of it is that it wants to express its influence."

The Cook Islands-China agreement reportedly includes plans for co-operation on seabed mining, the establishment of diplomatic missions and preferential treatment in regional and multi-lateral forums, but excludes security ties.

An attraction of the Cook Islands deal for China will "definitely" be minerals, Mahon said.

"If you go back to the technological revolution, which is really what's occurring in Chinese manufacturing, they need these minerals very much," said Mahon. "China is actually very poor in resources."

'China is full of Deep Seeks'

Meanwhile, Mahon said recent surprise around Chinese artificial intelligence (AI) company Deep Seek highlights westerners taking their eye off China and its burgeoning technology sector.

"China's full of Deep Seeks. There are companies in China, the names of which we just have never heard of, that are about to change major sectors that influence our lives."

So Deep Seek is like the first, I don't want to say shot across the bows because it makes a sort of military metaphor, but it is a flare, a signal."

"This is what China's been focused on in the last 10 years. Getting away from making nylon socks and teddy bears and cheap stuff and making really good technology, really sophisticated technology. And so this is what's going to come out of China now in waves and make all our lives cheaper in terms of buying stuff that's important to us," said Mahon.

"And it's going to be a major challenge to the major tech companies of the West, creating the kind of competition that markets run on. Innovation's driven by it. So this should be perceived as a positive thing."

In the podcast audio Mahon talks about these issues in more detail, plus this week's meeting between President Xi Jinping and Chinese business leaders, the "shameful scandal" of NZ immigration and visas "violating the spirit" of the FTA, China's relationship with the United States in the time of Donald Trump's second presidency, tariffs, trade war, and the "ghastly concept" of potential military conflict between China and the US, possibly over Taiwan.

"China doesn't want a war. China doesn't want to invade Taiwan. If China were to invade Taiwan, it would be out of
the global financial system within hours. China within six months would face a massive economic crisis," he said.

*You can find all episodes of the Of Interest podcast here.

Stats NZ’s final data release for the year revealed the economy has been shrinking at its fastest rate in three decades. While this may not be a very Merry Christmas, there is still hope for a Happy New Year.

Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile. 

But while private New Zealanders open up their wallets, the Government will continue to tighten its belt. Core Crown expenses are predicted to fall from almost 34% of GDP in 2025 to 31.5% by the end of the decade.

This would be enough to balance the books—if you ignore annual losses at the supposedly self-funded Accident Compensation Corporation—and halt net core Crown debt at 45%.

But Finance Minister Nicola Willis told Interest.co.nz this wasn’t her top priority. 

“Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,” she said in an interview.

“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense—not just in the short term for coloring the books and making them look pretty—but will actually generate a sustainable basis for growth in the medium term”.

Many left-leaning critics of the Finance Minster would like to see greater Government investment to support the growth forecasts next year. They worry a withdrawal in spending will hamstring the recovery and leave the economy less productive in the future.

It may surprise you to hear that Willis agrees with them. She says it is “factually incorrect” to accuse her of austerity, as the Coalition’s fiscal policies are still stimulating demand.   

“We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy.  And actually, the fiscal impulse will be positive.”

“But the point that we are making is this does need to unwind over time, and so we've set out a path of gradual fiscal consolidation, which we think is the responsible way to go”.

She says policies which deregulate the economy, open New Zealand up to more foreign investment, and crack down on uncompetitive industries will be more important to future growth than fiscal stimulus. 

Banking is one of these uncompetitive sectors in which she wants reform. She's already told Kiwibank to raise $500 million and the Reserve Bank to put more weight on competition when setting regulation policies, and is more than willing to go further. 

“When I read through the Commerce Commission report on our banking sector, it couldn't have been any clearer to me that we have a major problem,” she said.

“I have put the banks on notice and made it clear that if they want to do more of their nice talk about how they're going to be really good … that won't wash with us. They need to be acting or we will take further action, and there are a lot of options for what we can do there”.  

She’s open to charging banks a special levy or tax, like in the United Kingdom and Australia, which recognises they benefit from an implied Crown guarantee and earn very high risk-adjusted returns as a result. Big banks beware!

The Government could run a second retirement income scheme alongside NZ Superannuation as part of a transition to a new system, but according to Andrew Coleman, this couldn't be done without an increase in taxes on older people, or more general tax increases.

Fresh from his 13 part interest.co.nz series on NZ's government retirement income system and associated taxes, Coleman spoke to myself and Terry Baucher on a combined episode of the Of Interest podcast and the New Zealand Tax Podcast.

Coleman is currently a visiting professor at the Asia School of Business in Kuala Lumpur while on extended leave from the Reserve Bank. He has also worked for Treasury and the Productivity Commission. The views expressed are his own.

Coleman says the urgency for making change isn't just down to an ageing population and the increasing taxes he says young people will have to pay. It's also because those under 45 are inheriting a very costly system, which might not be what they like or want.

He uses an analogy of a 22 year-old who recruits help from their father or uncle to buy a car.

"And he says, 'oh, cars, I'm good at cars. You know, when I was a kid we had these great Holdens and you could put six people in them, everyone in the whole family would fit in them. And they had a big six litre engine'... And you say, 'oh, well that's maybe not what I wanted.' But he says 'oh look, I'll go and get you the car, just give me the money and I'll get you the car.' And so you give him ten grand and [he] comes back [with an] old Holden, which is a gas guzzler and not particularly safe."

"And you've only got a girlfriend or a boyfriend and no kids and it's nothing like the car that you want and yet you've paid for it. And it's got these high ongoing costs because it's chewing down the petrol," Coleman says.

"You wanted a little hybrid or electric car or maybe just a Toyota Corolla, which was quite small and fits in your little parking place. And it's a bit like that. Young people today are inheriting a [retirement income] system designed in the seventies when Holdens ruled. And it may not be what they want and it's very costly."

In his series Coleman suggests a new pension system, which he calls KiwiSaver 2.1, which would be a shift from pay-as-you-go funded pensions to save-as-you-go funded pensions. I asked him whether a transition could be made to the new system for those under 45, with the current system kept in place for older people, without higher taxes on older people which he suggested in his series would be required to change to a new system.

"There's no reason why you can't have two systems going. And one of the reasons is that your entitlement would depend on your birth date...that's very straightforward. We would just at some point introduce the second system for people under 45 and build it up and keep old people on the current system," says Coleman.

"Can we do it without an increase in taxes on older people, or more generally? No."

"There is a transition issue. It's like digging a hole. Once you've dug the hole, if you want to get out of the hole, you have to do some work to fill it in again. And so when we adopted a pay as you go system or expanded it significantly back in the 1970s, it meant that to reverse it, some future generations are going to have to be worse off than they otherwise would have been. And that's the political difficulty here. It's like there's this beautiful thing that you want over there, a beautiful island that you can go to, but you can't get there for free."

"But there's goodwill out there. I think a lot of people my age... recognise that young people are paying a disproportionate amount of the costs and that if we can find a way of increasing taxes on ourselves in order to make the system better for younger people, that's something that a lot of people would be prepared to do now. It won't have to be a permanent increase in taxes. It's a transitory phenomenon," Coleman says.

"Once we've got the new system up and running, taxes would come down and we would have a much better tax system. There should be, if we do this, a statue to the unknown 75 year-old who paid a few more taxes so that all the young New Zealanders of the future could be better off and have a better system."

In terms of what tax(es) are used, Coleman says a transitional social security tax on older people is an option. Social security taxes, such as Accident Compensation Corporation levies, are paid on labour income.

There's much more detailed discussion in the podcast audio including on taxes.

*You can find all episodes of the Of Interest podcast here.

New Zealanders should be grateful insurance companies remain committed to New Zealand given the country's risk exposure, John Lyon of Ando Insurance says.

In the latest episode of the Of Interest podcast I asked Lyon how well general insurers are serving New Zealanders, how competitive the market is, and how the public should judge strong financial results from their insurers. As well as being CEO of Ando, an underwriting agency, he's also the former CEO of Lumley Insurance. 

Statistics NZ's Consumers Price Index shows insurance costs rose 14% in the June year, making them a key contributor to households' cost of living pressures and the stubbornly high non-tradable inflation that meant the Reserve Bank held the Official Cash Rate at 5.50% for as long as it did.

"I think we should be grateful that there are insurance companies who are still committed to the New Zealand market, because what we need is a healthy, strong insurance market because the risks are so great in New Zealand," Lyon says.

"When you think about the risks we're exposed to from volcanoes that are overdue, to the well known earthquake exposures, the evolving cyclone and climate change issues, [and] we don't really fully understand tsunami risk. There's lots of evidence that there have been major tsunamis along the coast of New Zealand. At what frequency would we expect something like that to happen? We don't know. That's not been particularly well modelled. That's a major risk to the country."

"There's a whole bunch of factors in there that we can talk about in terms of what New Zealand Inc needs to do to protect itself from the environment we live in. And climate change is a big part of that. But it's also all of the other generic risks that are there in front of us. So we have to think about how we manage them as well," says Lyon.

With the likes of IAG, Suncorp and Tower having recently reported strong financial results, how should we judge how well they're doing financially?

"One of the things that the reinsurers did [last year], as well as putting prices up, was they went to the insurance companies and they said, 'you now need to hold more of the risk to your own account'."

"The Suncorps and IAGs, and indeed our business, was faced with a situation where if we had been holding, say, $100 million of the risk to our own account before reinsurance comes in, the reinsurers might have put that up to $500 million. So if you think about that, then if you've got an exposure of $500 million for any one event, you're not going to get $500 million every year."

"So typically what insurance companies will do is they say, 'well, maybe over five years, we'd expect to have $100 million on average. So it'll be one big event every five years. That's $500 million. We'd spread that cost over five years.' So in every year you'd put a cat allowance [catastrophic event allowance] in of $100 million. If you don't have a cat event, you've got $100 million profit and then the next year you might have no event and you got another $100 million profit. But in year five you've got a $500 million event and you lose $500 million."

"That's the market that we have moved to. The insurance companies need to be very profitable in the good years because the cost of managing the bad years is a lot higher. So it's not just reinsurers that suffer when there is a big event. The insurance companies hold more to their bottom line and that's a challenge for all the businesses in that respect," Lyon says.

"So it's hard to judge insurance on a year on year basis."

Lyon suggests the most significant barrier to enter the general insurance market is New Zealand's risk profile, noting a number of international insurers look at NZ and see the economy is relatively small.

"It'll never be a major strategic value add to a global company in terms of incremental growth. So all you're going to have is a problem when a big thing happens like an earthquake."

In the podcast audio Lyon also talks about what he believes should be done that would be more beneficial to customers' insurance costs than a market study, how the insurance industry is lagging from a transparency perspective, the perception of choice created by the big companies being behind numerous brands, how competitive the market is, the level of market power the big players have, climate adaptation, managed retreat and uninsurable areas, whether the general insurance market is a duopoly, insurance policies being used as a taxation device, risk-based pricing, parametric insurance, what the insurance equivalent of open banking could mean, and more.

*You can find all episodes of the Of Interest podcast here.

Milford Asset Management’s head of KiwiSaver says KiwiSaver – the country’s voluntary retirement savings scheme which is in its 17th year – is a teenager that’s about to head into adulthood.

“I think it's the right time to have the discussions we were having at the [Financial Services Council] Conference. By and large, providers are pretty well aligned around how we can improve KiwiSaver and make it better for New Zealanders retirements,” Milford's Murray Harris says on a new episode of the Of Interest podcast.

KiwiSaver has become a bigger topic of financial conversation this year and the discussion around potential tweaks and changes to the savings scheme has become more of a ‘when they happen’ and less of an ‘if’ scenario.

At the Financial Services Council Conference in early September, KiwiSaver was a hot debate, with KiwiSaver providers discussing how New Zealanders are simply not saving enough for their retirement and the Retirement Commissioner pointing out that Kiwisaver governance lacks clarity.

Harris tells interest.co.nz that KiwiSaver has been “very successful” in attracting members and the savings scheme doesn’t have a participation problem.

The latest KiwiSaver statistics out of Inland Revenue shows over 3.36 million people are now enrolled in KiwiSaver as of July 2024 and Harris says the participation rates are highest amongst those between the age brackets of 25–34 and 35–44.  

“The participation's really good, but we have an issue around the contribution rate or the amount that people are contributing,” he says.

“Most people are doing 3%, and ... 90% of employers only do 3%. So together, those contributions are not going to be enough to get people to where they need to be for a really comfortable retirement. And I think that's the key issue. That's the real nub of it being very successful in terms of getting people interested and involved, but we're just not contributing enough.”

The Financial Markets Authority released its 2024 KiwiSaver report on Tuesday which showed total KiwiSaver contributions – this includes employee, employer and government contributions – came to $11.2 billion in the March 2024 year. This is up 6.5% from the prior year.

Harris says the KiwiSaver industry has a job to do in terms of educating its members that the current default contribution rate in KiwiSaver, which is 3%,  is a good start – but not enough to get people to where they likely think they're going to be savings wise by retirement.

“Most people think it's 3%, and that's the problem with the settings as they are. You tell people to do 3%, that's what they'll do, and they'll think that's all they need to do. But in reality, it's a lot more,” he says.

The Retirement Commission has called for a higher default contribution rate of at least 4% and says employers should be matching at this level or more. 

Harris says there are also things New Zealand can learn from “the lucky country” – Australia  – when it comes to saving for retirement.  

The minimum contribution rate for Australia’s superannuation scheme – the equivalent to NZ’s KiwiSaver scheme – is currently 11.5% for employees and employers. This is being raised to 12% in 2025.

“They've amassed a lot of assets and they've been able to reinvest those assets into the local economy. So you go to Australia, you cross some wonderful bridges, the motorway systems, the tunnels through central Sydney. Now they've been built with superannuation money and it's been a win-win because the economy moves better, industry can move their goods and services at a better pace and they've provided some great investment returns for investors, for super investors. So that's a win win. I think that's something that we could definitely learn from,” he says.

*You can find all episodes of the Of Interest podcast here.

The integrity of bond markets on both sides of the Tasman is at stake as regulators probe issues of potential market manipulation, Australian Financial Review senior reporter Jonathan Shapiro says.

Shapiro is covering the Australian Securities and Investments Commission (ASIC) probe of the ANZ Group's role in a A$14 billion 2023 Australian government bond sale, and taking an interest in the Financial Markets Authority's probe into possible manipulation in New Zealand's wholesale interest rate and government bond markets. 

Speaking in the latest episode of the Of Interest podcastShapiro says the ASIC probe of ANZ boils down to allegations of interest rate rigging, allegations of providing false information to the Australian Office of Financial Management (AOFM), which manages the Australian government's debt portfolio and hired ANZ as risk manager for government bond issues, and workplace culture issues.

"What is alleged is in that role they [ANZ] might have moved the market in their favour and made trading profits. And those trading profits came at the expense of the [Australian] government because ultimately their alleged actions forced up the government bond [borrowing] rate. We calculated about five basis points extra ... and that's for $14 billion of debt over 11 years," Shapiro says.

ANZ Group CEO Shayne Elliott says the bank itself has found no evidence misconduct or market manipulation by ANZ in connection with the bond issues cost the government financially. Elliott also says whilst some information provided to AOFM may have been incorrect, this was a mistake, rather than a deliberate act. Meanwhile, three traders have left the bank and a fourth has been warned.

Shapiro says what's being alleged is very serious and everyone in Australia has an interest in the outcome because the government was ANZ's client.

In New Zealand the Financial Markets Authority (FMA) says it's investigating two complaints about possible market manipulation in NZ's wholesale interest rate and government bond markets.

Shapiro says market integrity is absolutely critical, with pension funds, sovereign wealth funds, central banks and other investors trading government bonds.

"They don't want to be on the other side of of any funny business...it's extremely important that these markets are trustworthy."

Because they're viewed as the risk-free rate of return, government bond rates underpin the whole market, Shapiro notes.

"So regulators should absolutely be looking at any issues in these markets and making sure that they're transparent, that they're clean, and that there's nothing untoward going on. And one would think that participants in that market, especially the big banks of countries like New Zealand and Australia, would have an interest in making sure that, firstly, they're doing everything they can for their client, the government, but also making sure the bond market works as efficiently as it can."

The ANZ Group has been left out of the last three Australian government bond issues, Shapiro says.

In the podcast Shapiro also talks about why he refers to the ASIC probe as the biggest scandal in the ANZ Group's 182-year history, goes into detail on the three key issues at stake and the ANZ Group's responses, what's at stake for the bank potentially financially and reputationally, as well as for Elliott, possible similarities with what's at issue in the FMA investigations and more.

*You can find all episodes of the Of Interest podcast here.

Grocery Commissioner Pierre van Heerden wants a third supermarket competitor to set up shop in New Zealand in order to tackle the country’s supermarket duopoly, but reducing the barriers to entry won’t happen overnight.

“What we've been told by these players is when they come and they want to open up a large store in New Zealand, the cost to get a spade in the ground is double that of Australia,” he says in a new episode of the Of Interest podcast. 

“Now that is significant. And when they look at 'do we open up a store in Wagga Wagga or Tamworth or wherever in Australia' versus coming to open up in Auckland where there is massive demand or any of the other centres, really, the cost is double that of Australia. And the timeframe often is more than double as well. So when they do their business cases, they look at that and say, 'well, we're going to be better off by going elsewhere rather than here.' Now the government is saying that they're going to change things to make New Zealand more competitive for international players. And that's really what we're looking at.”

The Commerce Commission released its first annual grocery report on Wednesday which revealed ComCom’s efforts to boost grocery competition over the past year hasn’t had much impact. 

The report found between 2019 and 2023, price-cost margins on non-fresh products across the New World, Pak’nSave, and Woolworths brands increased by 3.1 percentage points on average, while fresh food margins rose a lesser 0.4% on average.

The Commission defines price-cost margins as a measure of the difference between the price a firm receives for the sale of an item and the direct supply costs incurred.

Broken down, the price-cost margins for non-fresh products in that period rose the most at Foodstuffs North Island’s New World stores which reported a 3.9 percentage point increase in that period.

In second and third, Woolworths NZ’s Countdown stores, now renamed back to Woolworths, reported a 3.6 percentage point increase, and Foodstuffs South Island reported a 2.9% percentage point increase during 2019 and 2023.

The consumer watchdog said the report provided “clear evidence for stronger action” in NZ’s $25 billion grocery sector.

Speaking on the Of Interest podcast, van Heerden says the Commission wants to make sure the barriers to entry are reduced enough to make NZ’s supermarket sector more competitive. 

Barriers to entry for potential new supermarket hopefuls also include things outside the Commission's control like planning regulations including zoning requirements within the local council’s District Plan, and the resource consent process in some cases. 

The Overseas Investment Act 2005 can also create additional costs, delays and uncertainty in relation to site acquisition by overseas entities looking to enter or expand in the New Zealand grocery industry, van Heerden says.

Asked if a giant entity would be needed to enter NZ’s supermarket sector – which is currently controlled by Woolworths NZ and Foodstuffs – as a third entrant or if a smaller grocery player could work as well, van Heerden says it can be a combination.

“We would like to see someone who can come in and has the scale to do it nationally, because that's the way they're going to get the best prices from suppliers. You know, they can get good trade spend or discounts in their stores as well. Because when I look at Auckland as an example, in Auckland, the concentration or the market share of the major supermarkets has come down by 4% from 74 to, I think it's 70%. What has caused that – Costco coming into the market. A lot of the Asian supermarkets are growing and we've just seen Foodies open and they sold out from what I've seen, you know, four weeks' stock in three days,” he says.

“So consumers are anxious and they want to get better deals and they will support these players. But I want to see that same level of competition out in the smaller areas. And if a big player comes in and as in Australia, a hard discounter where they really give very good prices, I think that will shake up the industry and it will ensure that the big players are more competitive.”

Van Heerden says the supermarkets have “said all the right things” when contributing to the Commission’s work on the grocery sector

“If you look at the comments that both the major supermarkets have brought out since the report came out, they all say they work, they work with us, they support the objectives. But I want those words to change into actions. I want to actually see it happening. I look at, for instance, the refund policies and the pricing issues. We've raised that now with them since I started. And quite honestly, the response has been, 'yes, we're getting it done,' but the actual actions have been slow. So I'd like to see them ramping up those actions and letting their actions be the same as what they're telling us, that they're happy to work with us to get things done,” he says.

The Commerce Commission's grocery report can be found here.

*You can find all episodes of the Of Interest podcast here. 

With US Federal Reserve Chairman Jerome Powell signalling interest rate cuts ahead, the US dollar's likely to weaken with the Kiwi dollar rising against it, Imre Speizer, Head of NZ Markets Strategy at Westpac Institutional Bank, says.

Speaking in a new episode of the Of Interest podcast, Speizer says although the expected central bank interest rate trajectory is very similar in NZ and the US over the next 12 months, financial markets will focus much more on the US.

"If the two racehorses go neck and neck, that should probably be neutral for the Kiwi dollar. [But] I don't think it will be, because the market will put a lot more importance on the US side of things. So even though the yield spread between New Zealand rates and US rates might not move too much, just the fact that the Fed is cutting aggressively will actually weigh on the broader US dollar," Speizer says.

"So you'll get the market selling the US dollar against all of the major G10 currencies and that will have a ripple effect into the Kiwi-US exchange rate... And therefore, if we see that US dollar weakening, which is our view over the next few quarters, you should see the Kiwi-US, all things equal, rising a bit."

Speizer also expects local swap rates, already down significantly over the last couple of months, to continue falling.

"The swap rates are going to fall a bit further over the next few quarters, and that's simply mechanical. So even if views around the economy don't change, the markets have already priced in this whole easing cycle. So think of it as they're priced in, they know the Official Cash Rate is 5.25% today. They believe it'll be below 5% by the end of the year. And in a year's time, into the threes [3% range], that's already priced in," Speizer says.

"So as you move forward in time, those high OCRs drop out of the calculation of a swap rate and you just mechanically end up with a lower rate. So even if nothing in the world changed, you would see, for example, that two year swap rate moving from its current rate of about 3.85% down towards somewhere in the lower threes over time. So that's just time and the mathematics doing its work. It's not really the market moving as such."

"Swap rates are very important in the New Zealand financial markets. They're arguably the most important interest rate instrument. Whatever swap rates do, other interest rates will follow. So, for example, if your two year swap rate went up by 100 basis points, you would find mortgage rates following suit, other business lending rates, bond yields, pretty much anything. They are the foundation of all interest rates in New Zealand. And the swap rates themselves are constructed by expectations of the OCR mostly," says Speizer.

In the podcast audio he also talks about what in Powell's Jackson Hole comments surprised financial markets, what to watch ahead of September's Federal Open Markets Committee meeting, OCR market expectations, what the yield curve is telling us at the moment, how commodities might start to exert more influence on exchange rates, the NZ government bond market following the issuing last week of a $6 billion bond that attracted record interest of $22.7 billion, the yen carry trade, Australia, China, geopolitical risk, and where he sees the NZ dollar at year's end.

The process of growth will be the main benefit from a scaled up Kiwibank, while public acclaim will be a key measure of open banking's success, Commerce Commission Chairman John Small says.

Small spoke to interest.co.nz for the latest episode of the Of Interest podcast, which will be published later on Wednesday. The interview came after the Commission released the final report from its market study into personal banking services. The Government says it'll act on all 14 recommendations from the report.

Speaking in a previous Of Interest podcast episode, after the Commission's interim report was issued in March, Small said the most important of that report's 16 recommendations was; "The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete."

So why is that recommendation gone from the final report?

"We still feel that there's aspects of the regulatory regime that could be improved to promote competition. We've just, I suppose, got a bit more refined about how we're suggesting that that happens. And we've keyed in, particularly to a number of programmes of work that the Reserve Bank already has underway. So we've made a fairly broad overall suggestion about how the bank thinks about competition, which is essentially that we would like them to put a bit more focus on barriers to entry and expansion, so that it's more easily able for small players to get into the market, particularly the kind of players that we expect to be able to disrupt this industry who don't look like the traditional banks," Small says.

"Another one that applies more to the traditional banks is to think about the way that risk weights are calculated for reasonably standardised loans and make that more granular...so there's less averaging involved. It's a better, it's a more accurate, representation of risk and it gives them the ability to price loans differently depending on just how risky they are."

A helping hand for community housing

The Commission's also calling for the Reserve Bank to reduce the risk rating of lending to housing co-operatives and community housing providers to lower, and more accurate, levels. This is currently treated as commercial lending rather than housing lending.

Risk weightings are used to link the minimum amount of capital banks must hold, with the risk profile of the bank's lending activities.

"The work around mortgage advisors is also more nuanced, I should say, [is] probably the way to put it. We found out quite a bit about the mortgage advisor sector after the draft report and we had some of them around at our consultation conference... We [also] took some soundings in Australia about how their mortgage advisor sector works," Small says.

'The process of growth'

On the recommendation to scale up Kiwibank by getting it access to more capital, Small says the main competitive benefit "is about the process of growth rather than what happens once they're big."

"So we want them to be taking chunks of market share out of the big four on their way up, and for that to provoke a competitive reaction from the larger banks."

"What will really matter will be them [ANZ, ASB, BNZ and Westpac] perceiving a real threat of losing share, because that is what will stimulate them to fight back," Small says.

'Interesting stuff' from Westpac NZ's CEO

The Commission also calls for the acceleration and co-ordination of progress on open banking. In the podcast Small talks about lessons from the United Kingdom and hearing "some real interesting stuff" from Westpac NZ CEO Catherine McGrath. Prior to taking the Westpac job McGrath worked for Barclays and was involved in a Competition and Markets Authority open banking committee in the UK.

"We're just copying what we can, ruthlessly copying what we can," Small says. "So, you know, I absolutely grant you that in terms of overall open banking as distinct from payments, it hasn't been a roaring success in either of those places [Australia or the UK]. I think we can learn from both of them and do it a lot better."

Better bank switching desired

The Commission also says the bank switching service, operated through the bank-owned Payments NZ, needs investment and improvement.

"We were a bit surprised, to be honest, when we visited the headquarters of the big banks and asked them about this service and asked them in particular, 'if I was to come in off the street as a customer of someone else's bank and was interested in converting to you, would you recommend that I use this service?' And generally speaking no, they wouldn't."

"And they don't ask their staff to recommend that. So that tells me that it's obviously not being promoted. I think it could be improved, the actual functionality could be improved, it needs to be more visible and known and also they need to report on its usage, its success rates, what people think about it, and just that sort of basic transparency hygiene system would be very helpful indeed," says Small.

In terms of how open banking's success could be measured, Small suggests public acclaim is one way.

"I think if ordinary people on the street see it as being useful and working for them, then that's a great indicator...I would like to see it taking market share off the banks. Definitely. I'd like to see more variety of services out there and definitely like to see government agencies using it, because I think that's an important driver of success."

A message for consumers

And what's Small's message for bank customers?

"My message is you really should shop around. I don't like to just put everything back onto the consumers, but consumers can get better deals than I was aware of before I started this market study. For example, mortgages. You can usually drive a better bargain than you see on the headline [interest rate]. So shop around and be a savvy consumer."

"Also stand by and keep your eyes open for the innovation that we think is going to come. Some of this, by the way, is going to require change by consumers. There are a bunch of people out there, quite a large number of people in New Zealand, that are using somewhat dangerous banking technology that involves handing over their login details to a third party provider. We think that's something that has to be phased out. It's just dangerous. It's putting people at risk. So we think that what's coming up is going to be faster, safer, cheaper. Yeah. It won't happen tomorrow, but it will be here within 18 months or two years, I think."

What about splitting up the big banks?

Speaking earlier Wednesday Small said the Commission had considered recommending splitting big banks up.

"We did think about that, but we came to the view that the structure can be changed, the market structure can be changed through the two main levers that we're suggesting. One is a growing Kiwibank, and the main point about growing Kiwibank is that it will destabilise the big four as it grows. And then secondly, with open banking coming in, behind these are new business models that are not the same as the existing [ones]. And I think our view is that that's more disruptive and more enduring disruption, and more competitive innovation."

The Commission's final report is here.

*You can find all episodes of the Of Interest podcast here.

Deputy Governor Christian Hawkesby says the Reserve Bank's (RBNZ) Monetary Policy Committee might have taken a different stance in May if the economic activity forecasts had been more accurate.

In May, forecasts had anticipated 1% GDP growth for the calendar year. But by August, that had been revised to a 0.4% contraction, with a deep decline in the June quarter.

The RBNZ chose to cut the Official Cash Rate from 5.50% to 5.25% last Wednesday partly in response to these lower economic activity forecasts.

Another key factor was that businesses have been adjusting their wage and price-setting behaviour more quickly than anticipated in response to the low inflation environment.

Speaking in the latest episode of interest.co.nz's Of Interest podcast, Hawkesby said the committee would not have adopted such a hawkish stance if these data points had been available during the May meeting.

“The uncertainty was around the speed and intensity that [tight policy] would be felt in the economy … Since then we've had a whole heap of evidence on the downside playing out”. 

Uncertain

He said the OCR projection, published in that Monetary Policy Statement, was “flat with a slight upward bias” but with “big uncertainties” that were outlined in the record of meeting.

Weaker than forecast GDP was not cited as a risk in the May meeting record, and uncertainty about price-setting behaviour was described as an upside risk. The committee agreed that interest rates need to “remain at a restrictive level for a sustained period.”

The chapter on economic projections included a disclaimer that said there was “significant uncertainty” about the assumptions used in the baseline forecasts. But the possibility of easing rates in the near future was not mentioned in the 60-page document.

This shift led some economists to describe the August decision as a 'U-turn.' However, there was consensus that it was the correct move, given the clear signs of a weakening economy.

Stay off the track

Hawkesby also said there had been a “misconception” that the central bank was going to keep the OCR at 5.50% until it saw inflation below 3%. 

“You need to work on the basis that monetary policy is going to work. You don’t have to wait until the number is within the band, you just have to have confidence it will settle there.” 

However, the May monetary policy statement projected the OCR would remain above 5.50% until September 2025, by which time inflation would have been below 3% for a full year.

This was true in the February 2024 and November 2023 monetary policy statements as well. 

Hawkesby said the OCR track that published in each statement often gets overanalyzed, without enough recognition that it is based on a set of assumptions.

“There's something quite peculiar that happens when someone sees a line on a chart, or they see a number in a table, it has this sense of being real and factual,” he said.

“My advice to people would be to focus more on the record of the meeting than the OCR projection."