Why New Zealand has such a high inflation rate

Why New Zealand has such a high inflation rate

With New Zealand’s debt at 153,253 million and inflation through the roof I think you ought to save these two articles because they reveal what the media is trying to conceal. 

Why do they not tell the truth? 

This may explain part of the reason.

Reserve Bank repeatedly warned Government money printing would lead to house price inflation


Feb 05 2021

Grant Robertson and the Government were warned in January 2020 that there was a ‘significant’ risk Reserve Bank money printing would push up house prices and deepen inequality. Despite calls from the Reserve Bank that the Government would need to act to blunt the effects of this, nearly 13 months later, nothing has been done.

In November last year, when the national median house price hit $749,000 – up by more than $100,000 on the year before – Grant Robertson sent a now famous letter to Reserve Bank Governor Adrian Orr.

Since March, the Reserve Bank had been printing tens of billions of dollars and pumping it into the economy using something called LSAP (Large-Scale Asset Purchases). The LSAP worked; New Zealand’s unemployment rate of 4.9 per cent is well below where economists feared it might be.

But the LSAP has had some negative side effects too. Asset purchases have pushed interest rates down, unleashing a wave of cheap lending that has sent the housing market rocket to record highs in the midst of a global recession.

Robertson had initially been sceptical of the link between the Bank’s money printing and high house prices, but the Reserve Bank letter marked the point at which Robertson officially acknowledged that not only was the Bank’s money printing having an effect on the housing market, but that he and the Bank should work together and do something about it.

He took a long time to reach that conclusion. Earlier in the year, he’d been sceptical that there was a strong connection between the Reserve Bank’s money printing and out-of-control house price inflation.

In June, Robertson was asked by Interest.co.nz whether he would use his fiscal tools – like taxing and spending – to balance the effects of the Reserve Bank’s money printing.

“It’s not really the way I am thinking about it, our fiscal response has been to respond to the crisis and its effects,” Robertson said.

“But all of those issues, particularly in terms of how it will roll out in the housing market are still to come,” he said.

However, the Reserve Bank warned Robertson in January of nearly all the adverse consequences of money printing on housing and inequality in Aotearoa.

Policy advice released to Stuff and others under the series of OIA requests warned that an LSAP programme would lift asset prices like housing, deepen inequality and require some kind of intervention.

The Reserve Bank even warned that some kind of new governing arrangement for the Bank would be needed if it used tools like LSAP. This is because those tools step so far beyond the Bank’s traditional role in setting interest rates and into areas typically controlled by the Government.

Back in 2019, the Bank said that it would be looking at “unconventional” policy tools that it could use if its main tool – the Official Cash Rate or OCR – became ineffective.

The Bank thought there was a small but not inconceivable chance of this happening given interest rates over the world were fast approaching zero so, on January 29, 2020, it sent Robertson advice on what it was doing.

The Reserve Bank and Treasury should begin work on institutional and governance arrangements for what to do if the Reserve Bank started using tools like LSAP. This somewhat compromised the traditionally strict independence of the Bank and Treasury.

“With interest rates at historic lows, there is a risk that monetary policy could become constrained if interest rates fall towards zero.

“In such a situation, we consider it prudent that the Reserve Bank has alternative tools available to stabilise the economy and that the governance arrangements relating to the use of alternative tools are clear, comprehensive and effective.

It said that the Bank did “not think there was a case” for using these tools “in the near future,” but said that it would look to develop the tools and governance arrangements over the next six months to make sure they were ready if they were needed.

The Bank called these tools UMP, or Unconventional Monetary Policy. It includes things like negative interest rates, forward guidance, term lending to banks, and LSAP.

The advice came with several warnings, saying the “magnitude of the macroeconomic stabilisation benefits is highly uncertain”.

It also warned that there were significant trade-offs to each tool being used, including unfairly distributing winners and losers in the economy. The bank said that these were “externalities” and warned that they were “outside the Reserve Bank’s current mandate”.

Because those externalities were outside of the mandate of the Bank, it advised Robertson that it might be a good idea to look at how the governance of the UMP tools would work in practice; this would make sure that some of the unintended consequences in areas like the housing market could be managed.

Those risks were severe. The Bank developed a traffic light system for the severity of the effects of the new monetary policy tools. Green ones had “benign” trade-offs, while red trade-offs were the “most significant”.

Of the five kinds of UMP that the bank considered, LSAP was the only one considered to be rated “red” for its effects on inequality and fairness – the other tool the bank used this year, a form of term-lending, was rated orange, while all the other tools were given a green rating.

The Bank warned money printing might not have a neutral impact across society.

“It may increase wealth inequality by more than conventional monetary policy by raising asset prices more directly.

However, the Bank struck a note of optimism: by propping up the economy, LSAP could help people who might otherwise have lost their jobs.

The paper went on, “[c]onventional monetary policy has distributional impacts, such as on savers versus borrowers, wealthy versus less wealthy individuals, and importers versus exporters.

Whose problem?

The problem with these “distributional” impacts is that it’s not the Reserve Bank’s job to look after them. It’s job is to look after inflation, employment and the financial system. The social impacts of monetary policy are the Government’s problem.

With that in mind, the Bank warned the Government that both the Bank and Treasury needed to start thinking about ways of how to manage these new tools.

“At present, the remit requires the [Monetary Policy Committee] to seek to avoid unnecessary instability in output, interest rates and the exchange rate, but does not mention the impact of fiscal risk to the Crown or the distributional impacts of monetary policy,” the Bank warned.

“While conventional monetary policy has fiscal and distributional impacts, UMP could potentially have impacts that are more significant. Further work is required to consider whether and how these matters should be considered by the MPC or the Reserve Bank when using UMP,” it said.

The Bank sketched out some ideas for how to manage those distributional problems. One idea was from the Bank for International Settlements – effectively a central bank for central banks – to make sure that other parts of the Government responded to those externalities.

“The Bank for International Settlements (BIS) notes that some externalities can only be addressed by other policy areas, particularly fiscal policy.

“The BIS recommends central banks have a clear mandate, and communicate clearly and transparently about the use of UMP tools and their expected benefits, so that other policy-makers can effectively respond to externalities,” the paper said.

While the Government has said that it wanted fiscal and monetary policy to work together, Robertson’s comments in June are the direct opposite of what the Bank recommended in January, which is that the Government’s fiscal policy should target the unintended distributional consequences of the Bank’s monetary policy.

The paper warned that it would be a good idea to answer some of these questions in advance of any of the tools being needed. Robertson agreed to let the Bank and Treasury do some policy work and required them to report back in July.

A little over a month later, on March 9, Robertson received another paper, this time from Treasury, the Government’s economic policy shop. This was to brief him on a speech Orr was about to give on new monetary policy tools.

This paper warned that while the Government still wasn’t in a position where it would need to use LSAP, however Covid-19 had “increased” the chance of needing to use those tools.

Treasury also said that work was coming along with the Bank on some of the institutional settings that would be needed if unconventional monetary policy was to be used.

In the next week, everything changed.

Enter Covid-19

In another paper, delivered to Robertson on March 16, the Reserve Bank had gone from thinking that it was unlikely it would use any of the UMP tools to briefing Robertson on which tools it planned to use.

That morning the Bank had cut the OCR to just 0.25. The bank told the public that instead of cutting further, it would use LSAP to print money and inject it into the economy.

Treasury explained technical details of how the asset purchases would work, advising Robertson that he might shortly be called on to provide an indemnity for the Government debt the Bank planned to buy with all the printed money.

The paper also repeated the warning from January, that money printing could “raise asset prices more directly than conventional monetary policy, creating wealth inequality”.

By March 23, a week later, the Reserve Bank announced it would begin printing money to buy up Government bonds. It would eventually commit to buying as much as $100 billion. As of February, just over half of that money has been printed and injected into the economy.

Initially, Robertson and other members of the Government appeared blindsided by the effects of the money printing on house prices.

A couple of months after his comments in June, Robertson was asked on his way into the House, whether he was “worried” by the effect the money printing was having on house prices.

“I wouldn’t say it worried me, it is one of the conundrums of the situation that we find ourselves in – the housing market had held up significantly more than people forecast it would in these circumstances.

“We clearly keep an eye on asset prices and the last thing I want is for New Zealand to go through what it has in the past,” Robertson said.

Housing Minister Megan Woods was asked by Intererst.co.nz in October, after the median house price had risen by more than $100,000 in 12 months, whether she’d received any briefings on the effects of the Reserve Bank’s monetary policy on house prices.

Despite the fact the Reserve Bank had warned about asset price inflation, Woods admitted she didn’t get briefed by the Bank.

By the end of the year, however, the Government and Opposition both conceded that the Reserve Bank’s monetary policy was having an effect on asset prices. National’s shadow Treasurer Andrew Bayly wanted Robertson to send a letter of expectation to the bank, asking it to direct new monetary policy tools away from residential housing.

Robertson wrote a letter of his own, which acknowledged that monetary policy, among other things, was having an effect on high house prices. Robertson called on the Bank to help him with a policy response.

The Reserve Bank’s reply, when it came, was a subtle rebuke, noting, as it did nearly 11 months earlier, that house prices were affected by monetary policy, but also that it was the Finance Minister’s job to ensure that the social consequences of any monetary policy changes weren’t unfairly carried by one group in society.

The Bank called for a coordinated response from across government, potentially overseen by a new agency.

As of February 2021, there has been no fiscal response targeted at mitigating the effects of unconventional monetary policy on wealth inequality.

Don’t let the Reserve Bank just give the Government money, Treasury warns

Last May, Finance Minister Grant Robertson asked policy wonks at Treasury for advice on whether he should let the Reserve Bank Labour needs to throw conservative spending plans out the window

A Treasury paper, released to Stuff under the Official Information Act shows Robertson asked for advice on whether the Bank should be allowed to buy up billions of dollars of Government debt on the primary market.

Treasury thought it was a bad idea, warning the move would risk long term damage to the reputation of New Zealand’s public finances, creating the “perception that New Zealand’s strong institutional frameworks have been undermined”. This bad reputation could make it difficult for the Government to borrow in the future

Robertson took Treasury’s advice, and the Reserve Bank continued buying debt on the secondary market.

But the advice is itself interesting, as it gives an insight into Treasury’s thinking on one of the most interesting areas of fiscal and monetary policy: whether the Reserve Bank should just print money and give it to Treasury to spend.

This was only theoretical a year ago, but as Stuff has previously reported, it’s become something Treasury and the Reserve Bank have contemplated this year.

The paper, released to Stuff, doesn’t go so far as to contemplate Robertson being able to call up Reserve Bank Governor Adrian Orr and ask him to print money. It simply gives Treasury’s advice on what some would say is the first step in that direction.

Why does the Government-owned Reserve Bank buy bonds from the Government?

Purchasing debt (issued in the form of bonds) on the primary market means that instead of purchasing bonds from third parties like banks and investors, the Reserve Bank would buy the bonds directly from Treasury itself. One part of the Government would buy bonds issued by another part of the Government, cutting out the middleman.

It’s a big move.

Since the 1990s, the Reserve Bank has been strictly independent of the control of the finance minister and Treasury.

The Bank uses the setting of interest rates to make sure that prices remain stable and employment remains at its maximum sustainable level. The Bank’s independence means that finance ministers aren’t allowed to use the Bank’s arsenal of tools to their own advantage, for example by lowering interest rates close to an election.

Crossing the Rubicon

But in the age of Covid-19 this has come under strain. At the beginning of the pandemic, the Reserve Bank fretted that it was losing its ability to control interest rates; they were rising when the Bank wanted them to be falling.

As a solution, it started to purchase billions of dollars worth of Government bonds from banks and investors. This enormous demand for bonds pushed interest rates back down to where the Reserve Bank wanted them. The Bank at that point promised only to purchase them on the secondary market, not directly from Treasury itself.

This is important. The bank is buying bonds to make sure interest rates are low, it’s not buying bonds to help keep borrowing costs low as a favour to the Government, that’s just a helpful side effect. The Bank’s independence means it isn’t there to help out the Government when it gets into an expensive pickle.

Buying up Government bonds on the secondary market, although fairly common internationally, already inches the Reserve Bank into awkward territory when it comes to its independence. If it were to suddenly stop purchasing the bonds, Government borrowing rates would rise, much to the ire of the Government which would like to keep them low.

Buying bonds on the secondary market as opposed to straight from Treasury is a helpful barrier against Treasury and the Reserve Bank getting too comfortable.

What does Treasury think?

Back in May last year, when New Zealand was still in the thick of a serious economic contraction, the Reserve Bank asked Robertson to indemnify another round of bond purchases.

According to the paper, Robertson said he’d take the proposal to a Cabinet committee and asked Treasury whether the Bank should start purchasing the bonds directly from the Government.

The strongest reason for the Reserve Bank buying bond directly from the Treasury is to avoid having to pay a transaction cost when buying from a third party seller.

“[W]hen purchasing NZGBs [bond] in the secondary market, the Bank may pay a premium compared to the primary issuance price of the bond.

“In this sense, an intermediary ‘clips the ticket’ between the Treasury issuing the bond and the Bank acquiring it,” the advice said.

But saving the Crown money wasn’t enough to sway Treasury’s opinion, this is because the goal of the Reserve Bank’s bond-buying (known as LSAP) is to lower interest rates, not save the Government money. The best way to do this was by buying bonds on the secondary market, said Treasury.

“Transaction costs are very difficult to quantify, and depend on differences in the timing and composition of NZGB issuance and LSAP purchases.

“Furthermore, the Crown incurring such fiscal costs is consistent with the objective of LSAPs. By supporting prices in the secondary NZGB market, LSAPs help to lower private sector bond yield,” the advice said.

Another objection was that the Government might not issue enough debt for the Reserve Bank to buy if it wanted to lower rates.

Getting a bad reputation

But Treasury’s biggest concern was that skipping the secondary market would give New Zealand a bad reputation as it would look like the Reserve Bank was simply printing money for the Government to spend.

This would make New Zealand’s debt less valuable, meaning that in the future we’d have to pay people more to buy it, which would increase the cost of borrowing for the Government.

Treasury thought this was a serious concern.

“Market participants and commentators may interpret that LSAPs are being directed foremost to support Crown borrowing requirements, and that monetary policy objectives have been made a secondary consideration.

“These reputational risks are likely to be greater for non-market purchases, where there is less transparency,” the advice said.

And Treasury noted that, ironically, if buying debt on the primary market pushed up borrowing costs it would undermine the whole purpose of what the bank was trying to do anyway, which was to reduce interest rates.

“In turn, reputational risks jeopardise the effectiveness of monetary policy. Primary purchases would reduce the supply of bonds available in the market, which would normally reduce government bond yields.

“However, investors’ concerns about institutional reputation could cause yields to increase, increasing interest rates in New Zealand more broadly,” Treasury warned.

“A perception that New Zealand’s strong institutional frameworks have been undermined could impact on New Zealand’s credit rating and inflation expectations, which could increase the cost of borrowing more generally,” Treasury said.

Perhaps most severely, Treasury warned that these negative effects would be long-lasting, as it would take some time for New Zealand to build back a reputation for good institutions if it was lost.

“Potential negative impacts arising from institutional reputation, transparency, investor demand, market function and liquidity are likely to have impacts on borrowing costs that last much longer than any shorter-term impacts on net debt and/or leakage to the private sector.

“This is because it will take time after any LSAP programme is completed to rebuild confidence in institutions and market infrastructure. Borrowing costs may remain elevated until this occurs,” Treasury said.

The idea was hovering in the air in May, when senior Treasury and Reserve Bank officials prepared advice for Robertson on the implications of doing exactly what Treasury warned against: just printing money to pay for the Government’s borrowing. Once again, officials cautioned against it and the Government heeded their advice.

One thought on “Why New Zealand has such a high inflation rate

  1. Canadian pop. ~39 000 000. Debt Clock @ 4/9/23 = $1 214 868 000 000/39m=31 150.
    New Zealand pop. ~5 000 000. Debt Clock @ 4/9/23 = $153 267 000 000/5m=30 653.
    According to the sites .ca and .nz there are very different “Shares.”
    .Ca says “Your share” and a lower number. (34 801)
    .Nz says “Your household’s share” (78 882.)

    Inflation is definitely up by 20-30%. New info from China. Apparently the unemployment rate among those aged 16-24 is 18.1% officially.
    Canadian unemployment stands at “16% unemployed for 27 weeks or more.”
    New Zealand youth unemployment rate 9.75%

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