Economy Hub: Adrian Orr - Don't blame monetary policy for rising inequality

Reserve Bank Governor Adrian Orr during a press conference. December, 2019. NZ Herald Photograph by Mark Mitchell.

It is wrong to lay the blame for soaring asset prices and rising social inequality on monetary policy, says Reserve Bank Governor Adrian Orr.

Orr, who directly addressed the issue of asset bubbles and inequality in a speech last week, told the Herald it was important for the RBNZ to think about "the intended and unintended consequences" of policy.

"We don't shy away from the fact that one of the mechanisms of monetary policy is that it will hold up asset prices, but it is only one variable. Many other things can drive asset prices."

It was also a well known channel for monetary policy; one that was more powerful during different periods of the economic cycle, he said.

"If we are feeling wealthier, we have a higher propensity to consume and invest."

But it was a "partial analysis" to simply say monetary policy was allowing "the haves to have more" while the rest were missing out.

"That is utterly wrong," he said.

"The critical thing for monetary policy is to do our best to ensure low and stable inflation, because those on fixed incomes, whether on benefits or not, are the most impacted by inflation. They pay the biggest social cost for high inflation."

In times of economic crisis, it was household income, not household net worth that was the more pressing issue.

"Have I got an income? Have I got a job?" he said.

"This is where monetary policy is stimulating the economy; actively pumping cash in to do our best to keep employment at the highest possible level."

There are PhDs and Nobel prize winning papers written about the multiple causes of house prices and other assets classes, Orr said.

"Monetary policy is not the cause."

Orr said recent policy moves by the United States Federal Reserve to allow more focus on employment were in line with the RBNZ's thinking.

"We don't have unemployment as a target. We say we will do our best to contribute to maximum sustainable employment," he said.

"I wish we did have the tools that could make sure unemployment was forever low or zero.

"We don't. All we do is make sure the financial market is working in a manner that achieves that outcome."

But the RBNZ's dual target of low and stable inflation and sustainable maximum employment was very much in line with where the US Federal Reserve was, he said.

Federal Reserve Chair Jerome Powell. Photo / AP

"The US Federal Reserve's challenge, which we share, is being able to measure what is the maximum sustainable level of employment.

"So how trigger happy should we be if we think we're above that or below that … relative to where we are above or below our outlook inflation?"

The Fed's new policy allows a more flexible attitude to inflation with the goal of supporting higher employment.

That shift meant US monetary policy will likely stay stimulatory until there is hard evidence of inflation rising above targets, or unemployment falling below sustainable levels - as opposed to just relying on estimates.

"What they're saying is they're not going to jump at the shadows of employment or rising inflation," Orr said. "Don't jump at shadows, only jump at fact."

That's been interpreted by the market as meaning we'll see lower interest rates for longer.

That was a fair call, Orr said.

But it was always dependent on context.

In the current context of an economic crisis, low inflation and rising unemployment, that meant "they are likely to keep interest rates slow and stimulatory for a long period of time".

But monetary policy goals were just a means to an end, Orr said.

"They are not an end in themselves.

"The end in [goal] is economic well-being and prosperity for all people, now and into the future."