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Economy Hub: Adrian Orr on the politics of house prices and working with Grant Robertson

3 min read

If Reserve Bank Governor Adrian Orr was bothered by the very public intervention of Finance Minister Grant Robertson into monetary policy matters this week, he’s not letting on.

In fact he seems to be embracing it.

Orr says the public should get used to a more open and expansive dialogue between the Reserve Bank and other branches of Government on a range of social and economic issues.

On Tuesday Robertson, under mounting pressure on rising house prices, sent the Reserve Bank a letter which called on the bank to consider the issue more closely when it looked at monetary policy.

“We have a very strong relationship – between fiscal policy and monetary policy – the last nine months of this Covid challenge has made that stronger,” Orr told the Economy Hub after delivering the RBNZ’s latest Financial Stability Report yesterday.

“This letter from the Minister of Finance to the Reserve Bank is putting it on the table: please help assist us with ideas about demand and supply, the affordability and accessibility of homes for New Zealanders. I’m very pleased to receive that.”

The opportunity to consider broader economic issues is positive, he says.

“Too often people think about monetary policy as the end in itself not a means to an end. An end we’re always after is economic wellbeing for all current and future New Zealanders.”

Monetary policy plays a necessary but not a sufficient role in that, he says.

“There’s a lot of other economic variables that impact on our effectiveness. So we need to talk holistically.”

“Financial stability, inclusion, climate change, technology…these things impact us all so we can’t sit in our little departments in Wellington and say not my patient.”

Whether that translates to the RBNZ adopting Robertson’s suggestion that house price considerations be added to the monetary policy remit remains to be seen.

Orr says that is something to be worked through with the monetary policy committee in the lead up to its next official cash rate decision in February.

But he sounds less than keen on the idea of another target.

The Reserve Bank currently targets inflation and unemployment.

Right now the good news is that both are on the “same side of the fence” and require the same policy response, he says.

“Inflation is too low and unemployment is too high. There is no conflict,” he says.

“The conflicts that can happen are if, for example, house prices are high and consumer price inflation is low, that’s where we have to be careful.

“If you throw in additional targets…which one am I aiming for? You will not have a sensible central bank if you have four birds, one stone. What are you trying to hit?”

Orr says it is right that people should have high expectations about central bank independence.

That has been key to the success of monetary policy over the past few decades.

But he highlights the open and transparent nature of Robertson’s request.

“The true sense of operational independence is you can have open conversations but then we get on and make our decisions very transparently,” he says.

“The bottom line is that any government can come in and change our act anyway. That is not happening. Our act is what it is. Our operational independence is what it is.

Orr does acknowledge the impact that the Reserve Bank’s policy has had on asset prices.

“When we lower interest rates to keep unemployment low and keep inflation low and stable, it shifts asset prices.

“Housing is a considerable asset. We are part of the solution and part of the issue,” he says.

“Monetary policy is about lowering interest rates and encouraging people to spend and invest. That’s what it does, it brings consumption forward from the future.”

So he says he’s not surprised by the movement of house prices.

“It shows that monetary policy is working. People are consuming and people are investing.”

“The bit that annoys me is the options that are available to people when they want to invest and the mindset that Kiwis have when it comes to investing. Housing dominates all of the time.”

“So really that’s about a lack of depth and breadth in our financial markets. It’s about a lack of education around what alternative investments are. And yes, do we have a level playing field between those assets.”

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