Reserve Bank of New Zealand Governor Adrian Orr. Photo / Bloomberg
Reserve Bank of New Zealand Governor Adrian Orr. Photo / Bloomberg
Reserve Bank Governor Adrian Orr has responded to concerns that savers will lose after rate cuts by telling them to consider their investments and keep the pressure on their banks.
Speaking to the Herald this morning, Orr hit back at those claiming yesterday's double rate cut unfairly penalised savers withbank deposits.
"We absolutely acknowledge that monetary policy and interest rates are a blunt tool," he said. "The reason we've lowered interest rates is because we want people to be thinking about consuming and investing.
"[Savers] might have to think about investing in other assets if you want to get higher than what you consider the lowest-risk nominal return," he said.
"That is a natural part of monetary policy, saying: 'folks you need to put your capital to work better'."
Orr described as" very disturbing" comments by ANZ bank which suggested the rate cuts would hit deposit holders harder than they would bring benefits to borrowers.
"Because if you work through that, it just means that they're going to increase their margins," he said.
"If they sat back and thought about what they were talking about, they're saying: we're not passing it through."
Orr said the overall benefits of the rate cuts would still favour borrowers and stimulate the economy.
"Yes, savers will have lower-than-otherwise returns, but borrowers will have higher-than-otherwise returns," he said.
The Reserve Bank estimated the average saver would be down around $10 a week but the average borrower would gain about $40 a week, he said.
"So there's a four-to-one gearing ratio there to say there will be an increase in aggregate demand. Not a reduction."
Orr described the belief that higher rates automatically translated to higher real returns as an illusion.
"You have to remember that the single biggest destroyer of savings is inflation. So it is quite ironic that we've now got stable inflation and this is the criticism," he said.
Orr described ANZ Bank's comments suggesting the rate cuts would hit deposit holders harder than they would bring benefits to borrowers as 'very disturbing'. Photo / File
"I understand why but I don't have instruments or tools that are individual specific. We have one instrument and an inflation and employment goal."
The point was to incentivise putting money into investments rather than under the pillow, he said.
"You can start by putting cash under your pillow. Well, in inflation-adjusted terms you're losing. You can put it in the bank where at least you're getting inflation back.
"So stop suffering money illusion and if that's still too low a return then push your bank or push your investment advisers for alternatives.
"What people have to realise is that inflation is low, that's why interest rates are low. So in real terms you are still the same."
Orr said no central banker expected widespread adulation for monetary policy decisions as whatever they did would have pros and cons for different segments of society.
Monetary policy is a blunt instrument but it remains as effective an instrument as it ever was.
Orr said he did not buy the argument that the bank should hold back on cuts in case they were needed if conditions got really bad.
"That's kind of like saying I should take up smoking so I've got something to quit when I need to," he said.
The Monetary Policy committee had assessed the economy against the backdrop of slowing global growth and decided that the bigger was risk was not acting.
"The decision - 25 points vs 50 - was not to create the sense we're in crisis mode," he said. "It is just saying we are highly confident that lower interest rates are necessary at this point so let's get on with it."
It was possible that interest rates could be headed for negative territory, he said.
That was a reflection of a very different world we are in now compared to the big inflation days of the 1970s, 1980s and 1990s, he said.
Central bankers had succeeded in taming inflation and we were now in a world of much lower nominal rates.
"People aren't used to that," he said. "There's a communication challenge because it's just not in our living memory."
