Reserve Bank (RBNZ) Governor Adrian Orr defended the central bank’s monetary policy shift during a combative session with Parliament’s finance and expenditure committee on Thursday morning.
Committee Chairman Stuart Smith said the new policy statement had been described as a “complete 180 degree turn” on the May statement, and asked what had driven the “unexpected and sudden weakness” in the economy.
Orr initially refused to answer the question, saying, “I cannot give time to that. That comment is wrong, that's why. So, I won't bother”.
When pressed to answer, Orr said there had not been a U-turn and quoted from the July monetary policy review, which first opened the door to the possibility of rate cuts.
“I will quote: ‘the extent of restraint will be tempered over time consistent with the decline in inflation pressures.’ If people can't understand what that means, I'm not sure they should be commentating,” he said.
Brad Olsen from Infometrics introduced the specific phrase 'U-turn,' but various others described the August decision as a significant change in stance.
Nick Tuffley, chief economist at ASB, described the possibility of a rate cut so soon after the May statement as being a “Simone Biles-esque gymnastic move” in a note previewing the decision.
These commentators recognized the signal in July but still believed there was an abrupt change in policy between the May and August meetings.
Interest rates were tipped to rise in May, then the RBNZ signaled a change in direction in July, and by August, they had cut rates, dropping the Official Cash Rate 25 basis points to 5.25% on Wednesday. If it’s not quite a U-turn, then maybe it’s a three-point turn.
Whatever you call it, Orr said the July announcement showed the committee had growing confidence it would be able to ease monetary policy conditions if trends continued.
“And it's very pleasing to say that confidence has now reached a point where the committee was able to act yesterday,” he told the committee.
Faster transmission
The central bank leadership told the committee looser monetary policy may flow through to households and the real economy faster than tighter policy has over the past few years.
Assistant Governor Karen Silk, who has responsibility for markets and banking, said just over a third of households had a mortgage but those households tended to be higher income ones.
This means about 65% of all household income was impacted by mortgage rates, and will find themselves with more money to spend as they shift onto lower rates.
Since interest rates have been high, many mortgage holders have opted for shorter terms in the hopes that rates will fall. Silk said 70% of these mortgages will be repriced within the next nine to 12 months, significantly more than in previous years.
“So, our expectation is any reduction in mortgage rates from here, or lending rates for businesses, would pass through more quickly than we have seen previously,” she told the committee.
Bond traders have priced swap rates to suggest they expect the OCR to be cut by up to 200 basis points during that period, according to an ANZ analysis published Thursday.
Orr said mortgage rates were just one channel of transmission for monetary policy, and other channels would hit the real economy even faster than that.
Business confidence and expectations would rise, assets in the housing and equity markets would be repriced, cash flow in the economy would increase, and loans would become easier to access. All these factors could significantly impact economic activity, he said.
108 Comments
“I cannot give time to that. That comment is wrong, that's why. So, I won't bother”.
That just sounds arrogant and you would expect a leader to deal with questions better than this, particularly considering Orr is on a salary 2x greater than the chair of the Federal Reserve.
What about framing it like "when the facts change,......"? I suspect that he can't use these words because it would sound like he's not 'all-knowing' like many of the public sector boffins tend to perceive the bureaucratic overlords.
Couldn't agree more. The guy needs to remember he's working for the people of New Zealand in a role that requires imposing idiosyncratic financial pain for the good of the country. He should be doing his best to sell the logic behind their decisions rather than taking every bit of criticism as a personal slight.
Couldn't agree more. The guy needs to remember he's working for the people of New Zealand in a role that requires imposing idiosyncratic financial pain for the good of the country.
Yes. Considering that he has no bones about appropriating Māori deities to build his artificial construct on, it makes you wonder who he thinks he is. He has a responsibility to Māori and non-Māori - all of whom have limited to no influence on and democratic right to challenge to his power.
... if I was as rubbish at my job as Adrian is at his , the boss would write instructions for me on the broom handle ...
But I'm not on $ 830 000 per year ... nor am I capable of plunging the nation into a triple dip recession ... and causing thousands of workers to lose their jobs , and hundreds of business to hit bankruptcy ..
Fecking hell Adrian ... poke around the office , look under the desk ... the previous governor's copy of " Reserve Banking for Dummies " must be there somewhere ...
You can't just dis public servants...the rot began years ago in the private sector: look at how Fletcher's has been all but destroyed by years of incompetent management. Fletchers should have been a world-class infrastructure-building company dominant not only in New Zealand but also in Australia.
Then there's Z Energy who's directors were so incompetent that they virtually gifted the company, which still had plenty of potential value, to Australia's Ampol.
Now there's Manawa Energy who have had recent management changes and suddenly a major customer, who turns out to be a middleman reseller, defaults (supposedly) and Manawa loses tens of millions of dollars. There obviously should have been far closer oversight of such a significant customer.
Not to mention Air New Zealand. Do people not remember the once dominant NZ companies before the 1987 crash. Most quickly drifted into oblivion.
And currently The Warehouse has lost its mojo, no more evident than in its acquisition, Noel Lemming, which has now been routed by Harvey Norman (yes, an Australian company.)
It's not just public servants....it's a systemic problem across New Zealand.
... agree 100 % ... we're beset by cronyism everywhichway you look ... Feltchers is a classic case , with a board of directors filled with lawyers & accountants , but not a single ex tradie or engineer , no one who actually has had real life experience in the construction industry ...
However , on this forum we are discussing Captain Grumpy , Adrian Orr ... the Gnats need to grow a pair , and pay him off ... get rid of him ... they won't , of course ... regardless how incompetent he is , how much BS he spreads , we're stuck with the dopey sod ...
"The Reserve Bank throws truth out the window: its Monetary Policy Statement would make a Propaganda Chief from a Third World Dictatorship Blush"
https://www.downtoearth.kiwi/post/the-reserve-bank-throws-truth-out-the…
"There is a lot one could write about the Reserve Bank’s Monetary Policy Statement and the Governor’s (sadly all-too-typical) thin-skinned and defensive responses to questions since, whether from journalists or a lone MP at the Finance and Expenditure Committee this morning. He never ever acknowledges a mistake and seems utterly unable to cope with criticism or disagreement whether (as reports suggests) inside the Bank or (as we can all see) outside it. In a field where there is inevitably huge uncertainty, it renders him simply unfit for office. "
https://croakingcassandra.com/2024/08/15/heading-for-2-5-or-less-by-thi…
ZIRP probably worked just as intended. 'They' had spent nearly a decade trying to coax "Inflation!" out of it's fox-hole - all to no avail. Then, the opportunity of a monetary lifetime presented itself - a nasty flu. And so here we are. Trillions of extra Debt embedded in our Systems, and no show of retiring it; no desire to retire it. Is more of the same the answer, just as it was when Covid gave them their unexpected present? Of course! Until it isn't. And if we should have learned anything from history, it's that a Debt based monetary unwinding is fast, chaotic, uncontrollable and devastating on society.
But. I guess we're going to give it another go, regardless.
Come on mate, like 5% of mortgage holders got themselves in Donkey Do and bought a stupid high priced house when they peaked, the rest are just getting on with life and the mortgage rates that is sucking money out of the economy with zero return is killing the economy. It was time for a rate cut, many would say it was WAY too late for a cut.
"mortgage rates that is sucking money out of the economy with zero return is killing the economy"
I couldn't have worded that one better myself.
I hear that the chances that China (our biggest destination of exported goods) getting bogged in a Balance Sheet Recession are growing by the day. Our second biggest trading partner depends heavily on China too. Any suggestions on who or what is going to power along the next recovery are most welcome. As house prices continue falling the attached debt rises over more chimneys with each passing day.
Not pretty.
"...assets in the housing and equity markets would be repriced, .."
Perhaps....but I suspect that the banks will be happiest that (potential/projected) defaults may decline...whether that makes them any likelier to lend anytime soon is yet to be seen....I also note no timeframe.
100%
Some banks would be in a perilous situation should house prices continue on down. Which ones?, you ask. The ones with the biggest exposure. And calculating that is far more complex than it looks. Can we rely on the RBNZ to have done it properly? I'm not so sure ... That said, I'm not bothered.
You gotta admit though, buying in the last year was pretty canny.
Wouldn't mind betting the RE market is gonna start edging up, and people who were sitting on the sidelines make their move.
I'm certainly no economist, but the only economist I know who's rich is Jerome Powell, and he's worth US$112m.
Weren't economists invented to make weather forecasters and astrologers look good?
I'm certainly no economist, but the only economist I know who's rich is Jerome Powell, and he's worth US$112m.
Powell's worth is estimated to be USD50-112 mio. He isn't an economist and made most of his wealth as a partner at The Carlyle Group, one of the largest private equity firms, before founding his own firm Severn Capital Partners in 2005.
His annual salary as Fed chair was $226,300 in 2023.
What's up with 22 Duke Street? This is a parcel of land at the top of the area that Matvin/Fletchers are trying to get rezoned.
Mortgagee sale?? Owner paid $350k in 2003.
https://www.realestate.co.nz/42584401/residential/sale/22-duke-street-r…
Many (most?) other central banks are deploying the same sort of veiled communications. It is part of how they operate.
Aussie said low rates for ages
Powell's made inference multiple times to rate cuts.
None of them give clear parameters as to how/when they're going to make changes.
The thing is that they have made this uturn (yes that is what it was), but they don't seem to have waited to see what effect the tax cuts will have on inflation, as they are seen as being inflationary. The tax cuts may have had the same effect as a rate cut anyway as both put more money in peoples pockets. If inflation increases or stays above 3% they are going to look silly. The fact is that many things are still increasing by far more than inflation including rates and insurance.
“I will quote: ‘the extent of restraint will be tampered over time consistent with the decline in inflation pressures.’ If people can't understand what that means, I'm not sure they should be commentating,”
So there will be a large lag, by which time the effects of the hikes will have decimated much of the economy, yes, however as the governor of the RBNZ, you are expected to be accountable and give rationale to your decisions, clear ones, not patronise those asking for details behind your decisions which have far reaching consequences.
Assistant Governor Karen Silk, who has responsibility for markets and banking, said just over a third of households had a mortgage but those households tended to be higher income ones.
This means about 65% of all household income was impacted by mortgage rates, and will find themselves with more money to spend as they shift onto lower rates.
Of course Karen, but only those with high valued mortgages will get true relief and the percentage of those holding mortgages buying 2020 onwards is low compared to the rest of the mortgage pool. How many mortgages are owned by investors and not so relevant to consumer spending, and how many have kept their mortgage for revolving credit purposes?
Yip and as I mentioned yesterday some of those in the 65+ age group who a mortgage free, retired and are cycling their savings through term deposits are likely now to start cutting spending inline with their drop in income from their low risk investments (cash funds, term deposits etc). This may shrink the economy further ie rates are cut = drop in income for boomer retirees.
A family relative (over 70) spent basically nothing when rates were near 0% because they receive nothing in their savings. When TDs hit 6% they started spending in the economy as they had income greater than just superannuation.
They are now considering cutting spending again as TD returns drop. So they are cutting spending into the recession.
Seriously I_O?
You believe the oldies that you use as a reference, i.e. "retired and are cycling their savings through term deposits are likely now to start cutting spending", are going to have an effect? Perhaps, they'll cut down on their overseas travel?
But more seriously. Let's be clear that there are two extremes with the retired.
At the lower end there are quite a few struggling to make ends meet. Just like the younger members of NZ Inc. But at the top end? They're friggin living the high life. The distribution curve suggests a significant skew.
Younger people are struggling?
That's nothing new. When I was 19 I left NZ with $100 in my pocket, $50 of it given to me by my father.
After decades of work and making good financial and life decisions, I can retire and spend some of it. If you're asking me for sympathy for kids who pump out more kids you're barking up the wrong tree.
How about sympathy for your kids that left you behind to make it work in Australia? They didn't see value in sticking around and trying to make it work so they can spend time with you in your twilight years?
Not every young person financially squeezed by rent seekers in this country is a dole bludging loser.
My kids don't need sympathy, they're quite capable of making good decisions, like they've been taught. I can get to see them in 3 hours if I want and vice versa.
Hanging around near Dad wasn't something they were brought up to do, they were brought up to make good life decisions.
I might need the assistance of JFoe as I’m unsure of how much income will be lost for retirees as rates drop. As you say, it could be insignificant but I don’t know for sure. If you have real figures to back up your claim that my view is wildly flawed, please let me know.
eg does the benefit of lower rates for those with debt offset the lost incomes of those holding savings? And how could this impact the economy the next 12-24 months? It may be a net effect of zero becaus for every person I know of who has a $500k mortgage, I know another person with $500k they have invested in cash/savings/TDs.
So in theory, higher rates could have increased aggregate demand from one half of the economy (ie those with large savings of whom I know many in the 60+ age group). Dropping rates may force aggregate demand down from then unless their spending is offset by younger people with mortgages who are benefiting from lower rates (assuming they don’t lose their job as rates fall!)
From yesterday, and yes, it's a MASSIVE U-TURN, Mr Orr !!!
by Yvil | 14th Aug 24, 4:08pm
That's a massive U-turn from the RBNZ's May MPS from "we may have to raise the OCR and the first cut will occur in more than a year's time (Q3 2025) to CUT NOW". Somehow, they now seem to see what many on Interest have been seeing for some time.
Not sure what you guys want him to do. If he had said in May that there would be a cut in August, the markets would have priced that in earlier and potentially caused inflation.
He's playing a game of poker with the markets, and you want him to show his hand? I thought he bluffed quite nicely TBH.
Okay, so the deal is that Civil Servants should all lie right up until their decision is released so that people can't make financial decisions based on what they say they will do. Orwellian springs to mind. "Lies are truth." Maybe keeping this bloke on fits right in with the present government's culture. He sure fitted in with the previous government's strategy. Who would have thought he could work under both lots?
Sorry Adrian, I don't trust anything the RBNZ says at this time.
And I expect those poor folk that re-fixed their mortgages at higher rates, for longer terms, because they trusted the RBNZ when it said "no OCR cuts until Q3 2025 and they may go higher than 5.5%", feel likewise.
Should a class action be started so these people can recoup their losses, I will gladly contribute.
Come on no one believed that. Swap rates would have followed his lead if the market (the people) believed it.
If he had said he was going to cut 3 times this year, that would have been priced into fixed rates on that very day and potentially cause inflation. I actually have respect for him after that May bluff, he had everyone guessing which is exactly how it should be. He's not there to make friends.
Mr Jones,
Let me be frank.
When you say, "no one believed that", you are giving license to public officials at the highest level to lie.
Are you sure you want that? Your comments indicate that you think it is good thing.
Last time I looked, lying is an offence for any and all public officials.
Their "get out clause" is that they got it wrong? Okay.
But they need to front up and explain how the made the mistakes they have.
Warren Buffet can accurately forecast years - often decades - ahead.
If we're going to pay the RBNZ Governor a mega salary (plus pension) then why is it wrong to expect Orr to behave in a similar way? Little old NZ should be far easier than the billions Buffet deals with.
But I digress.
The V-turn was NOT !!! done in "a twelve month" like you suggest.
It. Was. One. MPS.
And. Then. The. NEXT.
Does "buyer beware" apply to all commercial enterprises in this country?
Or is it just housing/mortgage lending where subject matter experts such as economists can throw out wildly inaccurate "opinions" that young people look to as part of their buyer beware/due diligence? What about the subject matter experts that are the banks, who determine the stress test rates and sign off on these loans?
The banks only ever want a low OCR, so they can lend money to more kiwis that happily pay over 50% of their income on housing. Greed, FOMO and tax free equity leveraging is the reason the housing market can only end in collapse at some point. The current crash is just a blip on the screen.
The alternative is the top 10% will end up owning 90% of all property in NZ. The longer our politicians wait, to create a CGT and an escalating stamp duty on multiple home ownership, the worse the medicine will be.
I'm more worried about the health of the Nation now considering a Monkey-Pox and Syphilis breakout and Mexican Lolly Drug pushers dishing out meth lollies to the poor and vulnerable.
Or...
The OCR got wiped out by the ytd food inflation today, NZS's data 0.60% did it.
That $5/wk 0.25pts OCR cut on a $100k mortgage gets cleaned out with the banks dropping the savings rates by as much. And don't forget the 0.70pts decline of the NZD.
I don't know which is worse? Monkey Pox, Syphilis, Meth lollies or inflation, a Recession & a Stagnant Economy or a government with no idea.🤷♂️👨🏫🤦
Brad Olsen criticised him for the u-turn between May and now, and he responds by saying his messaging since July has been consistent...
What high frequency data are they seeing that has moved so much since May? Everything was already looking crap in May.
Sharon Zollner said the tactic was 'deny deny deny, cut'. He denied that, then cut.
Also, I've never seen an Interest.co.nz where (almost) everyone agrees with each other, well done Mr Orr on bringing the community together!
‘So I won’t bother’. That’s contempt for parliament. Many of his statements reek of arrogance, and are actually pretty high on my BS detecting instrument. In particular his quote from the July MPS statement and accompanying comment. Sorry Adrian, that passage you quoted could not be readily interpreted to explain your u turn
Some people should read the May MPS and the timing at when there previous decisions were made. May MPS was built before May budget was announced and with the lack of locked down information beyond tax cuts, and pushing out of water and transport costs out to councils ( ie more non trade able inflation) there was a definite top side risk that was identified in the report, and a holding of rates. It is not like they actually raised them in May. Government has pulled the handbrake so severely that PSI and PMI are in the toilet now hence the drop.
So why didn't the RBNZ come out and say exactly that in their defense?
I read their May MPS through and through. And at that time I said their comments, based on the data they presented, was utter nonsense. Should they have had the gall to present the defense you suggest, it would be far louder voices than mine calling them out.
A big problem is that 'signalling' is one of the RBNZ's strongest tools, so they need to play things up or down more than they might otherwise.
Then the second issue is that the media NEEDS the narrative to be one way or the other, things must be HAWKISH, or DOVISH we can't ever just be muddling along about right.
Orr does himself no favours in how he handles the press though.
Tony also told people to keep buying when the downswing started as the turnaround was any day now, and those that listened to him will likely be in negative equity now and paying huge amounts of dead money in interest, have had to take on more stressful jobs to pay the mortgage, cannot sell now to get out or they risk losing the lot and being in debt still. It may have worked well for you on the economic times you were blessed with, but have a think about the average couple who can't afford a crappy cardboard box of a house today due to the exorbitant price, let alone the prospect of having children if they ever wish to own a home for stability and security. Nah let's forget the next generations, riverhead to the moon....
Previous generations have also been in the same fix. In the 1980's mortgage rates hit 23% and for some with second mortgages, much higher. I was one of them.
How do you think that went? Mortgage rates are currently 7%, not 23%.
It's always best to ignore predictions and make your own decision.
Generations of goldbugs have thought they were going to get rich because 'experts' like Peter Schiff and Jim Rickards told them they would be, but alas gold's been a terrible bet, with extortionate commissions and no dividend, but try telling that to a goldbug.
Already on record here the turn around in the property market will be Christmas this year. Its partly seasonal anyway and the dropping rates and no doubt another 25bps in November is all it needs. If the RBNZ wants the economy to pickup faster then just drop the rates.
You get what you ask for... in this case transparency. Orr is easily the most transparent of any RB governor in the world, no one can deny that, with the insight into their thinking AT THAT POINT IN TIME. If you want him to keep his mouth shut then I bet you will all winge about that too....
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