Q&A with Reserve Bank Governor Graeme Wheeler

By David Porter -
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Regional business writer David Porter interviewed Reserve Bank Governor Graeme Wheeler following his briefing for BOP businesspeople in Tauranga on Tuesday. Excerpts from the interview follow.

•What are the key highlights of the BOP economy, compared to the rest of NZ?
• Particularly over the past year, the BOP economy has been growing very strongly. Retail sales have been running at 5.5 per cent, building permits are now running at close to 52 per cent whereas they are around 20 per cent in the rest of the country. Employment is very strong and it's been growing at around five per cent compared with two per cent in the rest of the country. You've got an economy that's growing pretty strongly in terms of consumption, building activity, and employment growth. You are seeing rapid house price inflation, at around 24 per cent over the past year. But in many respects the economy is doing well.

•What were BOP exporters' concerns about the strong NZ dollar?
• We talked about the NZ exchange rate. We would like to see the currency weaker, as we've been saying for some time. We have cut the Official Cash Rate (OCR) six times since June last year and the Trade Weighted Index is higher than when we started. In an environment where you've got slow growth globally, trade protectionist measures are rising, and the volume of world trade is falling, then lots of governments would like to see their exchange rate lower. The situation we've faced with is that the US dollar has been weakening by about five per cent this year. You've seen sterling weaken after Brexit, you've seen the Chinese weaken the reminbi. In that environment it's not easy to get the NZ dollar down when NZ is seen as such an attractive growth story and interest rates are higher here.

•You recently referred to the global economic scenario as a "phenomenal situation". Does traditional central bank monetary policy work anymore?
• Monetary policy works fine in NZ in the sense that we can have quite a considerable influence on non-tradeables inflation, which accounts for a bit more than half of the CPI. We still have room for cutting rates if we need to and we've indicated on our projections that we've built in 60 basis points of OCR cuts. We used 25 basis points in August [bringing the OCR down to two per cent]. If you ask what degree of freedom does a central bank have, which now has negative interest rates and large programmes of quantitative easing, the answer is not much at all. They don't have much more gas in the tank. If those economies get into trouble, then monetary policy isn't going to help out much more and they're going to have to rely on fiscal policy and structural reforms. We've got plenty of room to lower interest rates if we need to. Time will tell whether we need more than the 60 basis points or not.

•You are seeking ministerial approval to get debt-to-income (DTI) ratios as a macro-prudential instrument. Can you provide a bit more detail on that?
• We've got an MOU between the central bank and the finance minister about what are the objectives of macro-prudential economic policy, and what are the tools that could be applied. They don't include DTI ratios. We've had discussions with the minister about some of the benefits of introducing that instrument. We will report to him probably later this week, seeking his approval to introduce DTI ratios as a tool for possible future use. We've been doing work on it, and we've talked to the banks about it. [If approved] we'll probably set up a working group with the banks to discuss some of the issues. But we're not expecting to introduce anything this year.

•You've said the Reserve Bank can't fix the housing problem, but you have acted on loan to value ratios. Do you see housing price rises as essentially a supply problem?
• It's a supply and a demand-side problem, [but] it's a supply response that's needed to fix it. If you look at the demand pressures, immigration is a significant one, credit growth has been accelerating, interest rates are low. That's all adding to housing demand. You've got housing shortfalls in many parts of the country, but particularly in Auckland where you've got issues around densification and inner city building standards. You've got a lot of issues around planning approvals, delays and what sort of standards need to be met. You've got issues around the productivity of the building sector. In the end, what will fix [rising housing prices] is supply. You've seen that in Canterbury, where as supply has come on, those inflationary pressures have come off.

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