With record low interest rates only further inflating the housing and sharemarket, the RBNZ’s policies aren’t doing what they’re supposed to, writes Jenny Ruth of BusinessDesk.

What on earth is the Reserve Bank thinking?

Interest rates are at historic lows and yet the central bank’s officials keep talking about how they want interest rates to go lower still for both borrowers and savers.

The RBNZ already knows that the reason lending is contracting – except for buying houses – is because demand just isn’t there.

Its own data shows that while housing credit in August rose 6.5%, personal consumer credit shrank 11.5%, business credit eased 0.5% and credit to agriculture fell 1.2%.

One indicator of the collapse in demand is that business credit grew at an annual 6.6% pace in August last year.

And the reason few want to borrow at the moment has nothing to do with the level of interest rates – current interest rates present no obstacle to borrowing – and everything to do with confidence.

Of course, lower rates make existing debt cheaper, although with a lag for those who borrow for fixed terms, which means most mortgage holders.

But what the RBNZ wants to see is more spending, more investing and more economic activity.

Printing money

That’s what the RBNZ’s large-scale asset programme is all about. That’s a fancy name for printing money and the central bank had pumped out more than $36 billion by Oct 14.

“The aim of the programme is to inject money into the economy with the aim of lowering borrowing costs to households and businesses,” is RBNZ’s explanation for the LSAP.

So where has all that money gone? Two obvious places, the housing market and the sharemarket.

As of close of play on Thursday, the benchmark S&P/NZX 50 Index was up almost 9% year to date while national house prices were up 11.1% in September from a year earlier.

Demand is certainly there for houses – against all expectations, the 8,377 residential properties that sold in September were up more than 37% from a year earlier and the highest monthly number since March 2017.

Or as ASB economist Mike Jones put it, “the NZ housing market is going nuts”.

The RBNZ is well aware of this – its chief economist Yuong Ha told journalists last week that the “worse situation we could face right now would be actually if we had house prices falling.”

Demand for shares is arguably even hotter – NZX reported a near 45% jump in the value of shares traded in September compared with a year ago – the number of equity securities is actually down nearly 4% from a year ago.

Pyromania

As if these markets weren’t already running hot, the RBNZ is planning to throw yet more gasoline on these fires.

This will be in the form of a negative official cash rate and a Funding-for-Lending (FLP) programme, a scheme to funnel cheap money to the banks in the hope they will start writing cheap loans to households and businesses.

Westpac is predicting the RBNZ will introduce the FLP in November, but a negative OCR probably won’t happen until after March next year, if at all – the debate is raging, will they, or won’t they go negative?

Kiwibank chief economist Jarrod Kerr said the FLP “should be geared more towards business lending,” but noted that the RBNZ wants the simpler approach of encouraging lending generally.

That’s because the RBNZ is worried lending meaningful amounts will be more difficult the more complicated the rules are.

Certainly, the government’s business finance guarantee scheme, under which the government guarantees 80% of the loans, is a good example of a policy that has been ineffectual so far.

While the government allocated $6.25 billion to the scheme, by Sept 29 the banks had lent just $241 million, according to Treasury figures.

Tinkering with rules

How much of that low take up is because the scheme was poorly designed and how much is because businesses just don’t want to borrow is yet to be seen.

The government changed the rules in late August in an attempt to get more money out the door, including letting it be used to refinance up to 20% of a borrower’s existing indebtedness, but the total lending under the scheme between Aug 31 and Sept 29 rose just $65 million.

In the United States, the Federal Reserve hasn’t had much luck either with a similar plan under which it guaranteed 95% of each loan.

It wanted to lend up to US$600 billion through banks to small-to-medium-sized businesses but by Oct 7 had lent only about US$2.5 billion, or less than 1% of the planned assistance.

The other side of the RBNZ’s attempt to stimulate the economy through lower interest rates has already created a dire situation for savers because they’re getting negative real returns from bank deposits, even with the OCR sitting at positive 0.25%.

Kiwibank, for example, is offering those with $10,000 or more to deposit just 1% for any terms from 200 days out to five years. Deduct tax from that and then take away inflation, and your real return is deeply negative.

Taking risks

Inflation in the year ended June was 1.5% and ANZ Bank economist Liz Kendall is forecasting it will have been 1.8% in the year ended September – the actual data is due out next week.

Logically then, this will push savers further up the risk spectrum in search of at least slightly positive returns.

Or to persuade them to spend their money now, rather than save it.

But savers tend to be those approaching retirement or the already retired who want to earn enough from their savings to ensure a reasonable standard of living. Spending all now is not a sensible option.

The people who choose term deposits are self-evidently risk averse; do we really want them investing in riskier assets? We’re just a little more than a decade on from when a generation of such people lost $3.5 billion by investing in finance company debentures.

So the RBNZ is flooding the system with funds in the hope that businesses, who either don’t want it or need it, will suddenly start borrowing and investing again, while discouraging saving, encouraging spending, encouraging more risky investing and fuelling an already high-priced housing sector into the bargain.

It looks like the RBNZ is addressing the wrong problem.

This article originally appeared on BusinessDesk. Their team publishes quality independent news, analysis and commentary on business, the economy and politics every day. Find out more.




Source Google News