By Gareth Vaughan
Some economists may be picking further cuts to the Official Cash Rate (OCR) from its record 1% low, but Westpac New Zealand CEO David McLean is sceptical that further cuts would stimulate the economy.
Speaking to interest.co.nz after Westpac NZ posted its annual financial results this week, McLean questioned whether monetary policy works to boost the economy when the OCR is so low.
"I know economists views differ, but I'm personally sceptical of the effect of further rate cuts to stimulate the economy. You hear people in Europe saying these negative rates or very low rates almost have a counterproductive effect in that people think; 'I'll keep my money under the mattress and if the rates are so low this must mean the world's in a terrible state and therefore I won't spend money, and I won't stimulate things. I'll have to save even more for my retirement now so therefore I'll have to spend less, tighten my belt.' And therefore it has a contractionary effect," McLean said.
"It just feels to me that the whole world hasn't really worked out what the role of monetary policy is in this environment."
Asked what would stimulate the economy McLean didn't give any personal view, or preference, but said this was a big international debate.
"Do you use unconventional monetary policy with QE [quantitative easing] type tools? And if so what's the role of the central bank? Or do you use fiscal policy, should the government spend more? And if so what should it spend on because on the one hand what you call high quality spending on things like education, infrastructure and things like that tend to have a very slow impact. [it's] quite hard to get it spent. On the other hand just handing out money, helicopter money like John Howard did in Australia during the GFC [Global Financial Crisis], disappears quite quickly and the economy gets quite a sugar rush but it doesn't have a lasting effect," said McLean.
"It's something that we should all be talking about."
For its part the Reserve Bank argues it’s still getting bang for its buck by cutting the OCR even at such low levels. It has also detailed unconventional monetary policy options that could be used if required.
Economists from ANZ and ASB expect the Reserve Bank to cut the OCR by 25 basis points at its review next Wednesday, November 13, and continue cutting after that. And Kiwibank economists argue "the path of least regret" for the Reserve Bank is to stimulate now. However, Westpac’s chief economist Dominick Stephens changed his call last week. Previously Westpac's economists had been picking a 25 basis points cut next week. But Stephens now suggests with the US and Australian central banks not likely to cut rates again this year, and recent local economic data not bad enough to justify a cut, the Reserve Bank will hold fire on November 13.
Two worrisome issues for Westpac
In terms of the impact of low interest rates on Westpac NZ, McLean said there are two issues for the bank to manage that are worrisome.
"One is impact on margins because as rates get squeezed towards zero the margin gets squeezed as well. We've seen that we had a margin compression in our reported result, and if this continues that means the margin's going to be under more and more pressure," McLean said.
Westpac NZ reported an eight basis points year-on-year drop in its net interest margin to 2.16% in its annual results on Monday.
"And the second thing that I worry a bit about is the deposit funding of the balance sheet," McLean said.
"After the GFC we all became aware that wholesale markets, which banks like us have traditionally relied on heavily for wholesale funding, can close in a crisis like that and therefore that can be quite threatening for a bank. So we've improved our liquidity coverage massively and we've also increased our dependence on local funding from depositors. So we've really got a much stronger deposit-to-loan-ratio."
The bank's deposit-to-loan ratio was 76.60% at September 30.
"However depositors, particularly consumer depositors as rates get lower and lower, may find that they are forced to try and preserve their income, forced to look at other potentially more risky sources of fixed interest or other investment and that would then mean that we might start to see our deposit base erode and we'd have to become more reliant on wholesale funding. I don't think it would ever put us back to GFC-type levels [of wholesale funding], we've got so many other layers of protection, but it would still be an unhealthy trend and that is one thing I do worry about," said McLean.
A key factor in the reduction of NZ's banks' use of short-term overseas dominated wholesale funding was the Reserve Bank's introduction of the core funding ratio (CFR) in 2010. The CFR requires banks to meet a minimum share of their funding from retail deposits, long-term wholesale funding and/or capital. The minimum CFR for each bank - on a daily basis - is currently 75%.
McLean said Westpac NZ is not necessarily seeing depositors take their money elsewhere, but anecdotally they are looking.
"There are some features of bank deposits which depositors like - safety. If you look at the [credit] rating it's a lot safer than most other places they can put their money. And secondly the certainty of the income compared to investments like the stock market, which don't pay you so much a certain return. [Or] managed funds - the return is dependent on performance. So people quite like being able to budget and plan how much they're going to get. So there are some features like that that still make deposits attractive to a large sector of the customer base. But if rates do go lower then that is something that could be concerning for us," McLean said.
All carded, or advertised, term deposit rates for all financial institutions for terms of less than one year are here, and for terms of one-to-five years are here. And term PIE rates are here.
Term deposit rates
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29 Comments
Bang on!
I would go as far to say the government should bring in legalization to prohibit NZ asset sales to offshore entities that are based in tax havens or run their cost centres from the equivalent. Any government that promotes that legalization gets my vote.
What McLean doesn't mention is the banksters off balance sheet liabilities, and how the executives benefitted from that at the expense of the rest. Banksters have been attempting to create price inflation to sort out the liabilities they created, only to find out the customers that keep them in business can't afford to take on any more debt.
Those that can take on debt have been pumping the printed money created into shares and commercial property, where prices no longer reflecting the returns associated with the risk of ownership; and in time the chicken will come home to roust. Those that own the Federal Reserve have a lot to answer for, and they are definitely not going to heaven.
With NZ's woeful Thin Capitalisation rules and Approved Issuer Levy regime you do not need to be in a tax haven to rape and pillage by squeezing all your profits out of NZ as interest payments on lending to NZ entities. The profits flowing to Canadian Pension Funds at an effective 2% tax rate would blow your mind and explains why NZ industries at an effective 28% tax rate are getting hammered.
Exactly: We need to talk about that red carpet rollout
Why would an overseas buyer pay more for an asset than a New Zealander? Is it because they can accept lower returns on capital? Perhaps. Is it because they can sweat the asset more? Again, perhaps. But Chalkie reckons one reason stands out - tax.
Latest on the OECD's BEPS considerations;
https://news.bloombergtax.com/daily-tax-report/insight-oecd-transfer-pr…
Eliminate the current account deficit, otherwise ownership of the worthwhile bits of the whole country will be claimed by those which funded our excess foreign currency consumption.
New Zealand's annual current account was a $10.2 billion deficit (3.4 percent of GDP) for the year ended 30
June 2019, larger than the $9.3 billion deficit (3.2 percent of GDP) for the year ended 30 June 2018. Link
Ill informed jingoism has no place in NZ.
"the whole Central Bankers of the world (haven't) really worked out what the role of monetary policy is in this environment."
Many, if not most, of us realised 10 years back how corrosive low-interest rate were/would be. That bankers like McLean have just twigged beggars belief...
"Asked what would stimulate the economy McLean didn't give any personal view". That's because, like most of his colleagues, he doesn't have a clue what to do now...
(NB: Here's a suggestion to help you, Mr McLean. Nationalise the banking system in New Zealand and do away with your job. Let Adrian run the banking system for us - it's probably going to happen anyway, one way or another - and find alternative employment for the average wage of $50k pa and see how clarifying that experience is for you)
I think I'll disagree on you using the term "most of us", certainly doesnt incl myself and well your sentence doesnt make sense. Low interest rates corrosive? they are the medicine for the illness not the cause. Bankers dont know what to do? The analogy would be doctors and antibiotics, worked great for 70 years until we had super-bugs which are resistant to them so now ppl die. ie now doctors dont know what to do and in effect neither do central bankers, private bankers, nor pollies. So is there anything that can be done? no, there is no economic theory on how to deal with expensive energy and depleted resources too expensive to afford to extract both of which are needed for infinite growth.
Good call .... A national bank for the people to provide banking services for all that will keep depositors and everyday banking money safe and separated from the speculative and risky derivatives, insurance, stock market share buy backs etc.... The CEC in Australia have been proposing this since the GFC as they could see the dangers. They have even drawn up the required legislation!
So how does the bank make money to cover its operating costs and pay interest on its [deposit] accounts?
More fundamentally why should the Govn run a bank?
The earnings in such account with no risky investments allowed would then be tiny. So why put your money in it? better to have a small open account with $1 in it and when OBRs are threatened for private banks just transfer your money to safety...um yes OK....I guess.
So when it comes down to it why should the tax payer guarantee your deposits this way?
Read no further than the title itself to understand what the main problem with the world is right now.
Those in-charge of running the show have shifted their agenda from socioeconomic development and are obsessed with stimulating GDP growth instead.
Economic stimuli didn't deliver affordable housing, productive industries and high living standards for some of the most advanced economies around the world.
In fact, haven't we learnt the hard way under the John Key government that short-term stimuli often leads to unfavourable economic outcome.
Perhaps we should be clear that current monetary policy only has a short term stimulus effect and should only be carried out for a matter of months at most, not a decade. All the debt has such a huge downside as it's grown faster than incomes, this leads to OCR cuts.
Looking at the RBNZ household debt graph debt servicing as a percentage of disposable income is less than 8% yet that isn't doing any thing except feeding back into house prices. The total mortgage debt is still growing at above 6% pa, when productivity is growing at about 0.5% pa. There is a point where households will need to deleverage but we aren't there yet.
The low interest rates have created the environment for a worse outcome. Best to clear out of the debt zombies, ponzi schemes and failed companies. The same as what used to happen in the past. Delaying it for longer only makes it more severe.
You are also ignoring that you can unwind the global economy from this position. You just do it an a slower rate that the foolishness of the depression.
We aren't even close to the point where the planet can no longer support humans.
The problem with your hypothesis of being able to unwind slowly is, its never been done as once enough people see that effect happening they all panic and run.
The Depression was not "foolishness" as such it was the "natural" event. Simply, prices collapsed in a free market environment to the level of what the free market determined they were worth.
A dose of socialism or constitutional authoritarianism (as in Singapore) may be in order to wipe away the evils wrought upon the world during the last 2 decades, mainly GFC, QE, Low Interest regime, Gross and growing inequality, war, etc.
High time there is another Bretton Woods type meeting with BRICS nations taking the lead, you think ?
US should go more inward as Trump wants and take its hands off the world economy and politics.
"And the second thing that I worry a bit about is the deposit funding of the balance sheet," McLean said.
Hmmm...
The empirical tests rejected the financial intermediation and fractional reserve theories (Werner, 2014a, 2015) and showed that banks do not need prior savings, nor central bank reserves or other deposits to lend. Instead, banks create new money when they do what is called ‘bank lending’ ...
What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.The ‘lending’ bank records a new ‘customer deposit’ and informs the ‘borrower’ that funds have been‘deposited’ in the borrower's account. Since neither the borrower nor the bank actually made a deposit at the bank—nor, in connection with this transaction, anyone else for that matter, it remains necessary to analyse the legal aspects of bank operations. In particular, the legality of the act of reclassifying bank liabilities (accounts payable) as fictitious customer deposits requires further, separate analysis. This is all the more so, since no law, statute or bank regulation actually grants banks the right (usually considered a sovereign prerogative) to create and allocate the money supply. Further, the regulation that allows only banks to conduct such creative accounting (namely the exemption from the Client Money Rules) is potentially being abused through the act of‘renaming’ the bank's own accounts payable liabilities as ‘customer deposits’ when no deposits had been made, since this is also not explicitly referred to in the banks' exemption from the Client Money Rules, or in any other statutes, laws or regulations, for that matter. Link
Furthermore,
To the contrary, empirical evidence shows that the central banking narrative on interest rates is diametrically opposed to the observable facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead of growth, but instead are either coincidental or even follow it. Link
And forget QE - proof that money was printed into mainstream bank lending channels is absent:
In the Fed's own words:
The central message of the article is that the data in Figure 1 [the level of bank reserves] only reflect the size of the Federal Reserve’s policy initiatives; they say almost nothing about the effects these initiatives have had on bank lending or on the level of economic activity. [emphasis in original] Link
Looks like the Ozzy banks are just going to have to keep cutting their mortgage rates, most likely here too: Article ABC news: Interest-only loan reset hurting borrowers despite the rate cuts.
Key points:-
* Hundreds of billions of dollars in interest-only loans will be reset in the next three years
* Borrowers coming to the end of interest-only periods face thousands of dollars of extra repayments
* Some economists warn that the reset could cause a fire sale of properties if borrower can't meet repayments
https://www.abc.net.au/news/2019-10-28/interest-only-reset-hurting-borr…
Just ask the world : What after 0% ?
: How much in Minus can one go ?
: Once economy is use to 0% Interest than will anytime be able to raise ?
Is their no other way to boost ecenomy but to distribute money......How long and how much...sooner or later the bubble will burst.......can delay the inevitable but not avoid........Question to be asked will it than be worse than the Great Depression of 1930s..........
Even in NZ only Feel Rich is those who owns Housing assets - So is this the only Economy .....???????
Unknown territory and whenever it burst............
Meanwhile in Australia; 'Tax cut stimulus urged by CBA, Westpac'
https://www.afr.com/policy/economy/tax-cut-stimulus-urged-by-cba-westpac-20191106-p537uu
This sort of demand side initiative is a subsidy to employers which have failed or are unable to pay workers enough to allow net disposable income levels to clear the supply of consumer goods on offer. A comprehensive investigation into the funding of productive GDP qualifying enterprises that can employ people at the required pay scales is beyond necessity.
There are solutions however, the over-sized finance sector would rather maintain status quo. We could for instance..
1. Do the obvious thing and start defect spending for useful projects which create wealth for kiwis.
2. Something more radical. Monetize some of the private debt (QE for the people). Say 10 thousand dollars for everyone with an IRD number. The money must be used to cancel out debt. If the individual is debt free then the money must be used to buy NZ shares in that persons name. (This is Steve Keens idea)
3. This will never happen but.. Introduce some form of Glass Steagall so that deposit taking institutions cant engage in speculative risky activity like derivatives trading which exposes the government to bail out risk.
There is obvious capacity/labour underutilisation in NZ. 1 in 10 are underutilised. Government needs to spend some money to get this labour and capacity active. Run the economy properly hot, not fake hot. Then with true full employment there will be some actual wage pressure to invest in productivity gains. It is utopian to think the current slow decay and immiseration of the middle class will be politically sustainable. The pitchforks will be sharpened. Things can explode quickly. Look at Chile.
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