ACT leader David Seymour is questioning whether the Reserve Bank (RBNZ) should be made to use its monetary policy tools to target asset price inflation.
The RBNZ’s Monetary Policy Committee is required by law to “keep future annual inflation between 1 % and 3% over the medium term” and “support maximum sustainable employment”.
Its remit, issued by the Finance Minister under the Reserve Bank of New Zealand Act, defines inflation as Consumer Price Index (CPI) Inflation, as published by Statistics New Zealand.
Since the onset of Covid-19, the Committee has been working towards these targets by lowering the Official Cash Rate (OCR) and launching a $100 billion quantitative easing programme. It’s also in the process of designing a ‘Funding for Lending Programme’ through which it could lend to banks at a low cost to further help them lower interest rates on their lending.
But Seymour noted that these moves had seen the prices of assets (houses and shares) increase, while CPI inflation has remained stubbornly low.
“What you’re going to have to do is ask, ‘Should asset prices be part of the set of targets the Reserve Bank has?’” he said.
Seymour said he wasn’t going to make policy on the hoof, but believed it was something worth investigating.
“It’s a plan we’re holding with very light hands. I think there’s a serious monetary policy debate to be had. Thankfully we have interest.co.nz to lead it,” he said.
“Monetary policy is about to become sexy again, and it’s going to become a political issue…
“What the Reserve Bank is doing with their unconventional monetary policy, their super low interest rates… it’s all going into the walls of houses effectively. That ultimately leads to social exclusion and people being very upset…
“I think if asset prices keep rising every time the Reserve Bank prints money, there’s going to be more and more people around the world saying, ‘This economy doesn’t work for me, because I work so hard and the things I want out of life get further away’.”
Seymour indicated he was disappointed with the position RBNZ Governor Adrian Orr has taken to go all out trying to stimulate the economy to keep people in jobs; treating the affect of this on the housing market as a secondary issue.
He believed the RBNZ was “absolutely” going too far, but said once government re-looked at the law governing the Bank, it should “unquestionably” remain independent.
Nonetheless, Seymour didn’t hold back tying the RBNZ’s actions to his party’s ideology.
He believed the public would view the amount of debt being taken out by the government as less sustainable if the RBNZ wasn’t “artificially” holding down interest rates/the cost of that debt.
In this instance, Seymour maintained there would be more political pressure on the government to spend less - something ACT is campaigning on.
56 Comments
Michael Reddell casts a sidelight on this aspect of the RBNZ's mandate. Just let's say he's skeptical.....
Yup. That's a direct quote. I jokingly prefaced my first question: "A question for interest.co.nz readers..." Couldn't think of another way of segwaying from the breezy chat in the press scrum to monetary policy. Seymour responded: "I've got great news for interest.co.nz..." and referenced interest.co.nz a few more times. One needs a sense of humour when derailing these stand-ups to talk about stuff most of the others there don't care about.
Great work Jenee. It's astonishing how little so many 'financial' journalists actually ask meaningful financial questions. Disappointing time and again to see media simply repeating whatever line they're fed, even simple stuff like "returning Kiwis bidding up prices" without even looking at the data (as interest.co.nz has) to see if it stacks up. So pollies and bureaucrats repeat it, the media helps with the spin cycle, and it becomes fact by repetition. The impact of QE seems to have evaded most of them beyond reporting house prices rising without asking why, is it right, what alternatives are there, is the impact different in a low interest rate environment compared with higher interest rates, etc. And they are the most basic issues, unasked. Go interest.co.nz!
If the target was 0% house price inflation for the next decade or so, then at least wages could catch up. This would still be far better than the status quo (of significant appreciation). Post people have skin in the game (including the government and RBNZ) and any governing body is unlikely to look for big drops in the market.
Finally some politician who gets that there is a problem, ready to highlight the damage caused by this reckless and one-sided RBNZ behaviour. I hope that other commentators and media will have the balls to do it as well, and expose this Ponzi scheme, inflated by the reckless RBNZ. Bravo David - he was possibly one of the last politicians I would have expected to raise this point.
The sad thing is that the major parties do not seem to care about this issue; they just don't want to rock the boat and, and in their shortsightedness, they pretend that the irresponsible actions by the RBNZ will not have serious structural long term damaging effects - they only care about the next elections.
ACT was co-founded by a Labour politician ( Douglas) and headed for quite a while by another (Prebble).
Maybe a Labour + ACT coalition is something to contemplate? A prodigal sons moment, so to speak.
(Yes, I know - bizarre thought. But it's late Friday arvo; when all the best ideas come out! Voila - David Seymour's)
I just don't understand how it could be implemented. Any thoughts?
We've been falsely lead to believe there has been no inflation for the last few decades, yet if you look at say, M3, then that perhaps is far from true. So do we then come clean with ourselves and say we've been living double lives...actually there was inflation (just not 'consumption'), but we just decided to not measure it.
It would require a new rule book. Be interesting to see what the intelligent folk here at interest think about how this could be introduced without completely destroying 'the system'.
Might be worth looking at velocity. Data I've seen in US (they release it in easy to find, timely fashion, unlike here on both counts) show a spike in money supply but drop in velocity. Parked, not spent, means less price inflation.
The US has also fiddled their CPI equivalent more than NZ over the years (although ours is arguably not representative of actual household costs either) so that bakes-in apparently low inflation even when the reality may be higher.
Isn’t it just a matter of stats nz updating their basket of goods?
After the June 1999 quarter, we removed interest rates and residential sections from the CPI.
http://archive.stats.govt.nz/tools_and_services/newsletters/price-index…
Sure - at what weighting? Not everyone has a mortgage nor pays rent. If weighting is too high and land/house prices go up 10%pa - do we immediately crank up OCR to 5 or 10% and completely destroy the economy? Wouldn’t work.
WACC may mean projects are no longer financially viable, present value of discounted cash flow would destroy asset prices.
Yeah, the CPI weighting’s are a tricky one. How many people smoke?, and yet tobacco tax rises push up the CPI for all.
At the end of the day, it’s been decided that asset price inflation isn’t real inflation and income from asset sales isn’t real income.
You can understand why people are a bit miffed.
My understanding is that taxes shouldn't raise inflation as you suggest above (but get the idea of what you're saying with tobacco tax), but might be a tool that can be used to control inflation. I.e. the government takes money from the public/circulation in the form of tax.
Anyone an expert in this area?
We will get to a point, which I think we did in April, where we realise that the servicing requirements of the current debt load we have is more than what the productive economy can service. So that means asset prices are too high to be supported (asset prices are a reflection of the low interest rates and low interest rates are set because we argue we have no consumption inflation). Its a very fine balance at the moment that central banks need to get right otherwise we could sink into deflation and deflation when people hold a lot of debt will destroy the quality of living we have/had.
Maybe use fiscal policy with lots of support for home purchasers?
How it was before Richardson and Shipley removed such support, which worked; replacing it with corporate welfare for landlords.
It is interesting to look up Third Labour Government on Wikipedia, and scroll down to their housing policies. A time of lots of house construction.
Assistant Governor Hawkesby told Bloomberg that the RBNZ was thinking the same way as the Fed and would likely embrace a period of inflation above 2%. - source
In January of this year, the Federal Reserve – maybe looking ahead? – discussed some of these Japan, err, lessons.
"First, the Japanese experience shows that an announcement of a higher inflation target does not guarantee that inflation will increase to the new target level, even if the announcement is accompanied by a historically unprecedented degree of monetary accommodation. One could argue that the BOJ could have provided more accommodative monetary policy by even more aggressive asset purchase programs, interest rates at more negative levels, and better communication strategies. However, although such additional actions might have helped raise inflation to the new target level, it is highly uncertain whether these additional actions would have led to substantially higher inflation in Japan. In particular, there is a high degree of uncertainty regarding the effectiveness of asset purchase programs, especially when the size of the central bank’s balance sheet is already large, as well as regarding the effectiveness of negative interest rate policy…"
"Thus, in thinking about whether to raise the inflation target to a certain level, central banks need to take into account whether they are able to raise inflation to the new target level. If a new inflation target is too ambitious, and the central bank fails to attain it, the central bank may lose its credibility, which may render less effective any other policies it pursues."
Hear that, Jay? From your own central bank’s research. Bloomberg? CNBC? Anyone out there in the financial media? Bond Kings? Bueller?
Here’s one written by and for the Bank of Japan in July 2017 which attempted to explain why after three years of QQE plus 2%, the “irresponsible money printing” hadn’t achieved much (or anything).
"Specifically, we provide empirical evidence for what factors caused the actual CPI inflation rate to fall short of the BOJ’s original forecast made in April 2013, by using historical decomposition technique of simple VAR analysis. The empirical results show that among the deviation of the CPI inflation rate for fiscal 2015 from the original forecast of minus 1.9 percentage points – the difference between the forecast of 1.9 percent and the actual result of 0.0 percent – about 50 percent (minus 1.0 percentage points) can be attributed to the unexpected decline in oil prices. A little more than 10 percent (minus 0.3 percentage points) can be explained by the unexpected slump in output gap and a little more than 30 percent (minus 0.7 percentage points) by inflation-specific negative shocks."
Yeah, to start with, a full 100% miss. Supposed to have been one point nine and inflation in 2015 had turned out instead all of zero.
Again, it’s not really about just inflation. Even taking out each of the recessionary declines, QE’s – particularly QQE – come up short in every possible respect:....Link
For the love of all that's holy, this is not an RBNZ issue. No central bank has an asset price target, that's lunacy. This is a tax issue, NZ is the most undertaxed property market in the world - no stamp duty, no capital gains, no land tax. Building costs are also way too high - council regulation, virtual monopoly on supplies etc etc. Nothing to do with investors.
Pillorying the RBNZ is the the act of the economically stunted. Capital gains tax on investment property's is long overdue, even a land tax for investment properties has merit. But this won't bring the cost of housing down much, if at all.
For the love of all that's holy, this is not an RBNZ issue. No central bank has an asset price target, that's lunacy.
But they covet the exclusive outcomes of trickle down economics - which only favour the already asset and income rich minority.
Orr said the goal is to lift spending, although the Reserve Bank’s monetary policy statement acknowledged that recent declines in mortgage rates are expected to support house price inflation over the coming year.
“Lower than otherwise interest rates absolutely are done to stimulate spending. Spending can be investment, spending can be consumption, and it can be across many different sectors,” Orr said.
“Somehow in the psyche of New Zealand we all have to rush toward (thinking) ‘oh well, it must mean I have to rush to borrow to buy a house’. We are not saying that. We are saying spending and investing is now much easier,” he said. Link
and neither of those are remotely influenced by the RBNZ.
The RBA have just gone all in on property investment and will tolerate a bubble. I am picking NZ and Auatralian house prices plus another 20% in the next 2y.
https://www.afr.com/policy/economy/rba-green-lights-property-risk-takin…
And yet others have no trouble building volume: https://www.constructiondive.com/news/the-top-10-residential-constructi…
With D R Horton building nearly 60,000 houses a year.
I didn't say that, of course low rates and LVR removal have boosted the market. What I am saying is the RBNZ have blunt tools and have taken these steps to boost employment and keep families with mortgages in their homes - just like every other central bank. The LVR move was specifically to prevent homeowners getting caught by the LVR rules if prices fell and banks forcing them to sell up - not to boost investment.
Investors are one of several market participants, if they are driving up prices then let's tax them like every other country, it's not for the RBNZ IMO.
lol Seymour is just having a dig. He knows his idea is antithetical to the modus operandi of the RBNZ .. pertaining to their desired direction for house prices.
he's pretty funny .. a frank statement would be; the RBNZ should increase interest-rates, forcing mortgage holders and investors to sell property on mass - flooding the market, while increasing residential building. Mortgage holders on mass will face the consequences of their exorbitant loans and the RBNZ's past, artificially held low interest-rates.
But yeah, Seymour is funny .. lol :)
Seymour just dreaming, it's by purpose in the first place anyway to exclude the inflation of land & house price from CPI here in NZ. But hey dream is free - The best we could do as 5mil team is to be kind with 'RBNZ expectation assumptions', let's do this - let's keep moving - the rest of interconnected economic world can choose to be in trouble, NZ is unique - we've got the opportunity NOT to acknowledge it, this is the chance of life time to buy RE, it's a clear signs by authorities - they won't allow any downward correction in 'NZ Economy'
Oh, is Mr Seymour saying that we need to revisit the decision to redefine the inflation measure used by the Reserve Bank for its target range to remove inconvenient things like asset inflation?
A move undertaken to make Dr Brash look good, and to pretend the neoliberal monetary policy approach had some merit.
At the least, he is asking the question.
Is the CPI with the inflation targeting policy fra mework, the best way to monitor tthe impact of monetary inflation ( money supply growth ) , as it enters and flows thru an economy.
One if the primary mandates of a Central Bank is to maintain the " value", of fiat money.
M3 money was $85 billion in 1985 now we have about $400 billion.... Talk about unfettered money supply growth !
But that is the dirty little secret that our economic thinkers don't want people to know about. Is that if you look at money supply, we have had a decent amount of inflation, but its just that it hasn't moved into the prices of consumer items, its moved into capital asset prices (debt...). So we have a mountain of debt and no measurable inflation, so the only thing to do is to move interest rates lower and create more debt and higher asset prices - so that we've even more exposed to the entire system collapsing in on itself when we come to terms/understanding of whether we have the productive capacity to service the interest on that new debt. The margins appear to get slimmer each time the central banks make these moves to kick the can down the road. At some point it just won't work - I think it was pretty close in Apr.
You are both on the right path, tradable deflation is being compensated for by non-tradable (ie houses) inflation. It's the only way to avoid outright deflation.
The only way Western economies meet their future obligations (pensions for example) is to slowly but surely debase the currency. It's happened for century's.
We can argue about the appropriateness of allowing investors to buy property, but at the end of the day it's people behaving rationally with respect to how the system is set-up.
Hence the argument that is the system is broken. Usually at this part of the cycle a country gets @%@# over by another with its currency devaluation and results in a war to determine what the new rules of the financial system will be. 75-100 years is the normal time frame, and its 75 years now post Bretton Woods.
Question is how many countries will default on debt if the US keeps devaluing the USD and they can't do the same domestically? Are we starting to see that process play out now with downgrades on the cards from ratings agencies.
Wait, did we just agree on something?
I think it is probably more sustainable than you think for NZ. We will only ever issue NZ$ debt (so we will never be an Argentina), we can be energy independent (ish), produce primary products, have low population density, plenty of rain fall, well placed for Covid. Why do countries default on debt with a weaker US$?
But, I thought RBNZ were already targeting higher house prices? The higher the better.
Seriously, it's supposed to make homeowners feel better and go out and borrow and spend more. Which is good for us all, apparently. We just have to go on borrowing and spending more and more and more until everyone is happy. It's a popular delusion in their world.
Encouraging productive investment is so last century. We can all be wealthy by borrowing forever.
The problem is that at some point the cycle turns and they lose control of interest rates. They are nearer to that point than they realise. It is all built on trust and they are very close to losing it. These things are non-linear complex systems, sometimes they are resilient to changes and sometimes they are on a hair trigger.
Productive investment what for?
We can sell houses to each other for more and more.
If we don't have enough local buyers paying more we will import them from China again.
If buyers dont have deposit banks are now saying no deposit no problem and no repayment no problem.
Its gone so nuts I am even thinking of becoming an Auckland ghost owner of property simply alarmed with a gardener visiting once a month to get more cash out of local banks.
Lost faith in the banks here serving savers up maximum risk for zero return and an OBR event lingering next year.
I think what he is saying, is that it is easy for the inflation target to be met when you have a vent as big as the housing market that you influence but have no responsibility for.
If they had to, somehow, factor that in, then as a total system we would have more equality, and more discretionary income to be spent/invested on all those things we should be as individuals be in control of, rather than what more and more people are becoming, ie reliant on the Govt.
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