Hamish Rutherford: Political pressure rising on a political Reserve Bank


Precisely who is in charge when the Reserve Bank decides to restrict lending in the name of maintaining financial stability has been hard to pin down for a long time.

Back in 2013, the Reserve Bank began the process of developing loan to value ratio (LVR) restrictions, which would have a significant impact on many aspiring first-home buyers, a politically important group that even then was facing diminishing affordability.

But the central bank’s then governor, Graeme Wheeler, a former top international official with little political experience, was nowhere to be seen, as a debate over the policy brewed.

John Key and Bill English were forced to repeatedly explain the thinking behind a policy they neither created nor really wanted, albeit the merits of which were understood.

Eventually, according to legend, one of English’s press secretaries had to read the riot act to the Reserve Bank about discussing its own policy.

Although the communication was imperfect, in the end the Reserve Bank delivered a financial stability response to the inflated housing market which the Government of the day was unlikely to have implemented itself, because of concerns it could create a political headache.

Changes signalled by the Government last week make politically unpopular but arguably worthwhile policy less, rather than more, likely.

Grant Robertson’s surprise proposal that he gives himself the power to determine who can be the subject of lending restrictions has been framed as simply a clarification of what should happen now (with the Reserve Bank required to consult on proposed macroprudential measures).

But giving the Minister of Finance a potential lever to direct the Reserve Bank’s powers at a time when the central bank’s list of jobs is being broadened, means Robertson’s influence is chasing Reserve Bank governor Adrian Orr outwards.

Since becoming Finance Minister in 2017, Grant Robertson has broadened the Reserve Bank’s task from controlling inflation to maximising sustainable employment when setting interest rates. Last year he wrote to Orr and asked him to take account of house prices when making monetary policy decisions.

Even though the practical impact of the house price request may be, strictly speaking, limited (Orr pointed out in response that the Reserve Bank already considers asset prices when making decisions), the move appeared to be a symbolic instruction to address one of the Government’s political issues (and one which the Government could address without the help of the central bank).

At the same time, the Reserve Bank has been broadening its influence, taking active stances on climate change and lecturing the banks on lending and other decisions.

On Tuesday Orr implored New Zealand’s banks “to act with courage to keep providing banking services” to the Pacific Islands. While those services are no doubt critical to the communities they serve, with Orr the regulator of the banking sector, his voice will apply pressure in an area which has no clear link to his mandate.

Michael Reddell, a former top official at the Reserve Bank, argues for greater political influence of macroprudential tools. Aside from areas where it is easy to measure results (such as inflation targeting), he argues responsibilities cannot sensibly be delegated to independent bodies as the officials cannot be held accountable for the outcomes.

That may be correct, but it is just as much of an argument for keeping the independent Reserve Bank’s job simple as it is to have political oversight of its functions.

As it stands, we have a highly political Government expanding its powers over an increasingly political Reserve Bank.

While the detail of how the Finance Minister’s powers could be expressed remain to be seen, the idea that this would have a practical difference over recent policy, in a way which was positive (meaning, as always, house prices), is hard to accept.

When the Reserve Bank flooded the financial system with liquidity in 2020, part of its stated goal was to support asset prices, making rising house prices a feature of the response, not an unexpected surprise. Orr himself described rising house prices as a “first class problem”.

Labour gave no clear signal prior to the election that it saw rising investor activity in the housing market as a problem and certainly did not seek a mandate to constrain it.

Only months after the election did it surprise commentators with its plan to strip tax deductibility from loans on residential investment property, amid concern about rapidly increasing house prices, against the advice of Treasury or Inland Revenue.

Rather than increase the likelihood that the Finance Minister would have ushered in a coherent response to rising investor activity under the guise of financial stability, at best it is more likely that they might try to block measures which were politically unpopular (as LVRs were).

At worst, it could introduce political pressure for kneejerk reactions to existing problems under the guise of financial stability, when the Government has other measures available to it to address house prices that have nothing to do with the Reserve Bank.

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