Of Interest

The Reserve Bank recently increased the Official Cash Rate by a record 75 basis points as it tries to engineer a recession to fight the highest inflation in more than 30 years. But is bashing the economy into submission with its big, blunt monetary policy tool the best approach? 

To probe this and more I spoke with David McLeish, Head of Fixed Income at Fisher Funds Management, in the latest episode of our Of Interest podcast.

McLeish argues that monetary policy is largely focused on demand issues when supply issues are behind most of the current inflationary pressures. He also says he's quite optimistic about the alleviation of these inflationary pressures, arguing there are lots of reasons he can already point to as evidence monetary policy has done its job.

McLeish also explains why he's skeptical about whether inflation expectations set inflation, talks about the role of government fiscal policy in the current economic environment, the difficulty of setting interest rates by looking in the rear vision mirror for an economy that's six, 12,  or 18 months into the future, the distorted labour market, and much more.

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With three months between the Reserve Bank's last monetary policy review of 2022 and first one of 2023, it will be watching "high frequency data" during the break closely, says Karen Silk, Reserve Bank Assistant Governor and General Manager of Economics, Financial Markets and Banking.

Speaking in a new episode of interest.co.nz's Of Interest Podcast, Silk, also a member of the Monetary Policy Committee responsible for making monetary policy, says if the Reserve Bank's current hawkish outlook is to moderate it needs to start seeing a slowdown in the level of household spending.

Thus the likes of electronic card transaction data, retail spending, credit card survey data, plus manufacturing and services data will be watched closely.

In the podcast Silk also explains why inflation forecasts from businesses are important to the Reserve Bank, how close the Reserve Bank came to making a 100 basis points increase to the Official Cash Rate last week (it went for 75), and why core inflation when volatile food and energy costs are stripped out is such a concern.

She also talks about what needs to happen in the labour market for the Reserve Bank to consider employment to be reined in from beyond what's deemed to be its maximum sustainable level, and more.

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The Covid-19 pandemic has been a really challenging time, the likes of which we haven't experienced since World War Two. And it's against this backdrop that the Reserve Bank is waging its fight against the highest inflation since the 1980s, Kiwibank Chief Economist Jarrod Kerr says.

Speaking in a new episode of interest.co.nz's Of Interest Podcast, Kerr says he expects the Reserve Bank to increase the Official Cash Rate by 75 basis points to 4.25% when it reviews the OCR for the last time in 2022 on November 23.

"It is an aggressive move but the war on inflation is far from over," Kerr says. "The deceleration back towards price stability is going to take some time."

By the time the Reserve Bank is next scheduled to review the OCR, on February 22 next year, Kerr expects to see a significant slowdown in household consumption, further signs of a slowdown in global economic growth, and "hopefully" a slowdown in inflation.

"By the end of next year I think enough will have been done that we'll actually be in a situation where central banks, including the Reserve Bank, will start to ease monetary policy into 2024. So more hikes, more pain near term, a cash rate of 5% which sees mortgage rates staying around current levels if not a little bit higher. And then hopefully by the end of next year, the war on inflation will be won and we'll see central banks starting to reduce interest rates," says Kerr.

In the podcast he talks in detail about the inflation picture including core inflation, the labour market and why the Reserve Bank wants to see a rise in unemployment, plus the role of government fiscal policy. Kerr also discusses just how disruptive the Covid-19 pandemic has been to the economy, when the world last witnessed shocks of this magnitude with war-time settings such as closed borders and disrupted supply chains, and the changes this has wrought on the economy.

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New Zealand ought to move from an "ad hoc" immigration policy disconnected from other public policy settings to a long-term government policy statement to assist with infrastructure and other planning, Productivity Commission Chairman Ganesh Nana says.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Nana says the government's formal response to the Productivity Commission's inquiry into NZ's long-term immigration settings is expected before Christmas. Among other things the inquiry, completed earlier this year, recommends a government policy statement requiring governments to set a clear strategic direction for immigration policy.

Nana notes the level of immigration influences the overall population, the requirement for infrastructure including transport networks, hospitals, schools, energy requirements, early childhood needs, and regional development. At the moment there's a "disconnect" between immigration settings and these other areas, and a disconnect between workforce training and skills development and labour market policy, Nana argues.

He also wants to see a longer-term focus for immigration rather than the "ad hoc adjustments" currently made every few months or years. This ought to have a timeframe of at least 10-years.

In the podcast he talks about these issues in detail, plus how often the government policy statement could be revised, the idea of holding a referendum on the population size we want, the recent slowdown in population growth and decline in areas such as Auckland and Wellington, the impact on natural resources and land use, why the population size isn't the answer to productivity or wellbeing, what he'd like to hear during election year, what the Treaty of Waitangi means to immigration, and more.

"Migration is always going to be part of our population story," Nana says.

"The world is going to be a lot different and if we continue to plan on the past we will be disappointed. I think we've got an opportunity to set our own path, and our own trajectory in terms of population, in terms of migration and population growth. Let's do that openly and explicitly rather than stumble into the rather large population growth we had pre-Covid."

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Why do banks love housing so much? Is this good for the overall economy? And if not what, if anything, could be done to change things?

We address these questions in the latest episode of interest.co.nz's Of Interest Podcastwith Martien Lubberink, Associate Professor at Victoria University’s School of Accounting and Commercial Law. Lubberink has previously worked for the Dutch central bank and contributed to the development of bank regulatory capital and disclosure standards both in Europe and globally.

New Zealand banks do the majority of their lending to people buying houses. ANZ NZ, the country's biggest bank, has $104 billion of housing lending, which is 71% of its total lending. It's a similar story at the other major banks. At ASB 69% of total lending is housing lending. At Westpac NZ it's 66%, at Kiwibank it's 84% and at BNZ it's 55%. 

In the podcast we discuss how and why bank regulatory capital settings incentivise housing lending, how the political economy favours home owners, the potential of so-called fintech financial service providers to boost borrowing opportunities for small businesses, or SMEs, and more.

"We are very much focused on lending to residential real estate, our homes. We've got no capital gains tax, everything's geared up to supporting the home owners. And that is because we vote for that, we want that. We are not explicitly voting for SMEs, and SMEs themselves are fragmented, poorly organised. So they can not stand up against powerful politicians, [the] powerful interests of other parties. SMEs are in a way the wallflower of our economy and that's kind of detrimental because a lot of growth and great ideas will come from that sector," Lubberink says.

"The banking system in itself is not a problem, it's more the way that the lending is organised. And that's more like a political deal made between voters who want their homes. In fact these homes are subsidised because there's almost no risk attached to them. If something goes wrong owners will be bailed out or banks will be bailed out. That's the world we live in, which I think is very hard to change."

"There is a bit of a trade-off. The banking system is safe. On the other hand the big problem still is the very large exposure to a single asset class [housing]. If something goes wrong in that single asset class it goes wrong very quickly," Lubberink says.

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The resumption of overseas tourism isn't merely a matter of flicking a switch with everything then returning to how it was.

Rebecca Ingram, Chief Executive of Tourism Industry Aotearoa, says the industry, dramatically impacted by the Covid-19 pandemic with the border closed and domestic travel restricted for periods of time, continues to face major challenges.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Ingram says there's no understating the impact of the last couple of years.

"This restart we're going through at the moment, it's really not just flicking a switch. You can't just shut something down for a couple of years and then hope that it will turn back on just the way it was," says Ingram. "So it's very difficult out there at the moment. People are having to make lots of choices with imperfect information."

While the industry is feeling quite hopeful about the upcoming summer, flight connectivity isn't back where it was pre-Covid, and the industry lost 72,000 workers. Ingram says tourism businesses are recruiting for everything from beauty and massage therapists for spas and hotels, to mechanics for rental car companies right across the country.

And in a world where climate change and net-zero carbon emissions is on the agenda, there's also debate about the types and volume of tourists New Zealand should be targeting.

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There's no silver bullet law that parliament could pass to cover off all the good and bad aspects of the crypto and blockchain industry, according to an adviser to the parliamentary select committee running a cryptocurrency inquiry.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, MinterEllisonRuddWatts partner Jeremy Muir discusses a wide range of crypto-asset related issues.

A leading lawyer for cryptocurrencies, digital tokens and coins, non-fungible tokens (NFTs), and other blockchain projects, Muir is one of two special advisors to the finance and expenditure committee for its crypto inquiry.

"Our role now is to write a report that will be delivered to the committee. It has been taking time because it's a very fast moving space, so as soon as you write one thing something else comes along. But we are nearly done, that will be delivered shortly. Then the next stage will be for the politicians and the select committee officials to write their report, which will then be tabled [in the House] together with our advisers' report," Muir says.

"The thing to note, and this will certainly be reflected in our report, is that because this is a very fast moving area, there is not necessarily a great advantage to being a fast mover when it comes to writing new laws," says Muir. "New laws may become out of date almost instantly, or they will be compared to new laws in other jurisdictions perhaps favourably, perhaps unfavourably. But it is a real chess game to decide when it is actually helpful to do so."

"We will certainly be counselling as part of our report that there isn't a single easy fix, there isn't a single crypto act which will make all of the scams and problems go away whilst also encouraging innovation in the industry," Muir says.

In the podcast Muir also discusses the New Zealand blockchain scene, the Financial Markets Authority's attitude to the industry, NZ regulatory gaps, overseas regulations, stablecoins, and the "battle brewing over the future of money."

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Six years after Auckland Council passed the Unitary Plan, with scope for increased housing densification to boost supply and improve affordability, what impact has it had?

Quite a bit according to University of Auckland Associate Professor of Economics Ryan Greenaway-McGrevy.

Speaking in the latest episode of interest.co.nz's Of Interest Podcast, Greenaway-McGrevy talks about a recent paper he co-authored on the impact of upzoning on Auckland housing construction, plus a range of other housing related issues.

Greenaway-McGrevy explains why he believes Auckland leads the world when it comes to upzoning, the impact of the Unitary Plan on residential building consents, and where Auckland's at with housing affordability and rents.

He also discusses land prices versus land costs and explains why he supports the concept of a land tax.

We also talk about the Medium Density Residential Standards following 2021's Resource Management (Enabling Housing Supply and Other Matters) Amendment Act, and what these could mean for cities and towns around New Zealand, including Christchurch where the Christchurch City Council voted against the new housing intensification standards.

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In 2005 Earl Bardsley wrote an article published in the Journal of Hydrology highlighting the possibility and potential of a pumped hydro storage reservoir at Lake Onslow in Central Otago.

Fifteen years later Energy and Resources minister Megan Woods announced $30 million had been allocated to develop a business case to tackle New Zealand's dry year storage problem. This would mostly focus on a pumped hydro storage project at Lake Onslow.

Bardsley, Honorary Associate Professor at Waikato University's School of Science, talks about the Lake Onslow pumped hydro concept in the latest episode of interest.co.nz's Of Interest Podcast.

Should it go ahead the project would be a massive public infrastructure project taking years to complete, impact the local environment, and cost billions of dollars. Effectively it would involve soring energy like a battery, Bardsley says.

Water would be pumped up to a high elevation from the Clutha River and stay there until it's needed.

"So the energy is stored in the form of gravitational potential energy," says Bardsley.

The potential volume of water held, the capacity for generating power, and the actual energy stored would be massive. As potentially would be the impact on electricity supply and storage.

"I think the key selling point would be that it's an enabler to get rid of fossil fuel power generation, and secondly more than that it's an enabler of the green transition. So we can actually go ahead and move into EVs, maybe green hydrogen, because it's just not obvious to me that there are other mechanisms around by which we can actually do that," says Bardsley.

Part of the NZ Battery Project under the oversight of the Ministry of Business, Innovation & Employment, advice on technical, commercial and environmental feasibility studies of the Lake Onslow option is scheduled to be provided to Cabinet in December. 

There's more from Bardsley on the Lake Onslow proposal here.

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Following probes into the conduct and culture of banks and life insurers in 2018 and 2019, the Financial Markets Authority (FMA) is preparing to start regulating the conduct of financial institutions.

The incoming regime aims to ensure financial institutions do what's best for their customers over the entire lifecycle of a financial product, and introduces a fair conduct principle through which financial institutions are required to treat customers fairly.

Why is change needed? What problems is the conduct of financial institutions regime designed to address? And what changes will consumers and the public notice?

To address these questions and other issues I spoke with Clare Bolingford, the FMA's Director of Banking and Insurance Conduct, in the latest episode of interest.co.nz's Of Interest Podcast.

"What the new regime does is it puts a legal obligation on banks and insurers to make sure they are treating customers fairly, that's the central principle," Bolingford says.

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