Cabinet papers reveal Finance Minister Grant Robertson has disregarded implicit IMF and explicit Reserve Bank warnings of the risk of political meddling in the property lending market. Jonathan Milne reports.
The Reserve Bank will update MPs on its plans to control lending on residential property, knowing that if it doesn’t get results then the Government is ready to step in.
As the Reserve Bank reveals how it wants to deploy new macroprudential tools, the Minister of Finance Grant Robertson has announced plans to take a greater role in deciding which tools should be in the Bank’s toolkit. This is a long-term move that sends Reserve Bank Governor a clear message about how the Minister would like his relationship with the Reserve Bank to change in the short-term.
“The Reserve Bank is concerned that giving the choice of instrument to the Minister, allowing the Minister to override or reverse instruments that the Bank is deploying, not only impacts the Reserve Bank’s operational independence, it also runs the risk of exposing the process to political pressures.”
– Reserve Bank advice
The most important and controversial change is that the minister no longer has to wait for the Reserve Bank’s advice on the scope of lending standards.
The big, ongoing review of the Reserve Bank Act is being led out of the Treasury. And Robertson has chosen to follow Treasury advice in drafting the new laws.
In the future, the Minister of Finance will be able to make regulations defining or changing the scope of lending standards as long as the minister first consults with the Reserve Bank. A future minister need not pay any heed to the Bank’s advice.
Buried in a 254-page Cabinet paper, published on the Treasury website, is the warning that peer review and Parliamentary oversight will not provide sufficient safeguards for the Reserve Bank’s use of its macro-prudential tools (or lending standards). Such tools can generate significant “distributional” consequences, the paper says, and may have implications for other areas of government policy.
That’s why Cabinet agreed that the Minister should have the ability to make a decision on the scope of lending standards that is at odds with the Reserve Bank’s advice.
“For example, if the Reserve Bank were considering new lending standards for interest-only mortgages, the Minister could recommend that a tool to ban interest-only mortgages be added to the Reserve Bank’s toolkit via regulations, which may differ from the Reserve Bank advice,” the advice says. “However, it would still be up to the Reserve Bank to determine whether or not it would be appropriate to deploy this tool.”
By contrast, Cabinet papers show the Reserve Bank was concerned at an erosion of its much-vaunted independence. “To an extent it could undermine the Reserve Bank’s status as the specialist agency and its operational independence to deploy macro-prudential instruments in an optimal manner to address financial stability risks,” its advice cautions.
“The Reserve Bank is concerned that giving the choice of instrument to the Minister, allowing the Minister to override or reverse instruments that the Bank is deploying, not only impacts the Reserve Bank’s operational independence, it also runs the risk of exposing the process to political pressures.
Reading the tea leaves on housing prices
With little in the way of authoritative house price data since ministers announced changes at the end of March, everyone is anxiously swirling the dregs in an attempt to read the tea leaves. And not always getting the same reading of the future.
Here’s an example. Realestate.co.nz published its residential sales report for April this week.
Newshub reported the seasonally adjusted figures as “running hot” and trumpeted that the average asking price for Kiwi properties had risen from $835,844 to $839,035 (up 0.4 percent), over the course of the month. Interest.co.nz reported the unadjusted figures dropping from $863,396 to $845,056 (a 2.1% decline) and concluded they showed “further signs of the housing market starting to cool”. The economists at KiwiBank said, “anecdotes and realestate.co.nz activity data suggest an immediate cooling, albeit from very heated levels”.
“At a time where the Government is playing a much greater role in supporting the economy and investing for the future, it is crucial that we ensure that we are getting value for money from every dollar of spending, and that across the public service initiatives are being delivered in a way that supports our economic recovery.”
– Grant Robertson, Minister of Finance
It’s impossible to draw a useful comparison with realestate.co.nz’s April 2020 figures, because the country went into Level 4 lockdown then, but look back over the years before that and it’s clear there’s always a drop-off in volumes and a wintry chill to prices in April.
The question is whether this year’s cup of tea was colder than usual. So the journalists and economists are all entitled to stand by their interpretations – as tea leaf readers usually do.
The reason this is important is that the Minister of Finance and the Reserve Bank are relying on the same dregs in the same stained teacups as everyone else, ahead of the first Financial Stability Report of the year, this week.
Little wonder, then, that the Bank is stalling on its response to the Government’s package of new housing policies. It will, however, provide a preliminary response to an unprecedented directive from the Minister of Finance, under section 68B of the Reserve Bank Act.
On February 25 he directed the bank to factor housing into its remit to manage the economy’s booms and busts.The Minister wants “sustained moderation” in house prices, and expects the Reserve Bank to help him deliver it. In the same breath, he asked the bank to advice on the implementation of its long-favoured tool of debt-to-income caps, as well as interest-only restrictions.
Grant Robertson’s changes to the Reserve Bank remit were followed last week by the announcement he would rewrite the bank’s legislation to award himself greater powers to tell it where to regulate lending in the economy.
Then on Tuesday this week, in a pre-Budget speech to the Wellington Chamber of Commerce, he revealed the Prime Minister had tasked him to lead a new implementation unit based in her department to ensure the Government is tackling its three core priorities of climate change, child wellbeing and (no surprises here) housing affordability.
“At a time where the Government is playing a much greater role in supporting the economy and investing for the future, it is crucial that we ensure that we are getting value for money from every dollar of spending, and that across the public service initiatives are being delivered in a way that supports our economic recovery,” Robertson said.
“I call this the corporatisation of the Reserve Bank. Politically appointed board members will be accountable for the Bank’s decisions.”
– Andrew Bayly, Shadow Treasurer
Separately, Robertson is amending the Public Finance Act to allow the minister to bail out a failing financial institution in a financial crisis, even without appropriated funds. This authority will be similar to the existing authority to incur expenditure in a civil defence or health emergency.
As New Zealand went into level 4 lockdown last year, and the economy nosedived, the extent of the Minister’s regulatory power became quickly apparent. The Public Finance Act ensured he could find money at short notice in a natural disaster; he could put money into the health system in a health emergency. But without a Parliamentary appropriation, it would be very difficult for him to provide funds to bail out a bank, or two banks, or three … if they started spiralling into bankruptcy.
That is why the Deposit Takers’ Bill announced last week has grown into something far, far bigger than its working title. This is not just about providing a backstop to mum-and-dad investors in the next finance company collapse; this is not just about tilting the playing field back towards firsthome buyers; this is the Minister declaring that the distribution of economic wealth is a legitimate matter for an elected Government to decide.
Eroding Reserve Bank independence?
These developments have been inviting a colourful debate about the respective roles of an elected Government and an independent central bank.
Writing on Newsroom Pro, University of Otago economist Dr Dennis Wesselbaum warned of an “unprecedented attack” on the Bank’s operational independence, which had delivered the country stable and low inflation rates since 1989. “We are witnessing the beginning of the end of independent and sound monetary policy-making in New Zealand,” he wrote.
And Andrew Bayly, the Opposition’s shadow treasurer, says Robertson’s intervention is “dangerous”; that the Minister should not make such dramatic changes to the relationship between the Bank and its political overlords without cross-party agreement.
“Thirty years ago Ruth Richardson’s reforms took politics out of the Reserve Bank; now the Minister is turning back the clock to give the bank an overt politicial character.”
– Andrew Bayly
He is concerned to see powers moved from the Governor of the Reserve Bank to the bank’s board, which is appointed by the Government of the day. “I call this the corporatisation of the Reserve Bank,” Bayly tells Newsroom. “Politically appointed board members will be accountable for the Bank’s decisions.
“Thirty years ago Ruth Richardson’s reforms took politics out of the Reserve Bank; now the Minister is turning back the clock to give the bank an overt politicial character.”
Bayly sits on the finance and expenditure select committee, which is to report back later this month on the first tranche of changes coming out of the biggest Reserve Bank review since the defining legislation was set in place in 1989. That so-called Institutional Bill will be followed by a Deposit Takers Bill, Robertson announced last week. One shouldn’t read too much into the bills’ names: they don’t reflect the true breadth of the changes and are likely to be changed in due course.
What they do demonstrate is a continued flexing of government muscle. That is already clear in the Institutional Bill, which empowers the minister to set the Reserve Bank a financial policy remit – as well as the existing monetary policy remit that requires the Bank to work towards a 2 percent inflation target, low unemployment and now, sustainable house prices.
The Bank, in turn, its flexing its muscle with a more intrusive approach to supervision of the banks, insurance companies and other institutions under its oversight. Here’s an example: in March the Reserve Bank raised concerns around Westpac NZ’s risk governance processes and instructed Westpac to commission two independent reports to address them. It was concerned Westpac NZ wasn’t holding sufficient liquidity, nor properly reporting its liquidity.
“To an extent it could undermine the Reserve Bank’s status as the specialist agency and its operational independence to deploy macro-prudential instruments in an optimal manner to address financial stability risks.”
– Reserve Bank
Reserve Bank Governor Adrian Orr is the face of the Bank’s monetary decisions, but he’s no longer the decision-maker. Decisions like the Official Cash Rate are now made by a Monetary Policy Committee that includes experts from inside and outside the Reserve Bank, and now, the Government’s Reserve Bank review moves more of his powers to the Bank’s board. Some are interpreting this as a reflection of the battle of wills between Robertson and Orr – but in truth, the move away from a single decision-maker is consistent with previous directions, and with international best practice at central banks like the Bank of England.
The minister will grant permission over regulating lending to particular sectors, rather than the use of particular tools
The new Deposit Takers’ Bill will give the Minister of Finance oversight of where the the Reserve Bank may impose lending constraints – specifically, over residential, commercial or agricultural property. But he will no longer decide how the Bank constrains lending. Tools like loan-to-value limits, or the limits on interest-only loans and debt-to-income ratios that the bank is considering this month, will be a decision for the Bank.
“The Bank will continue to independently set prudential policy, subject to strengthened accountability and transparency requirements and a requirement for it to have regard to the government’s Financial Policy Remit.”
– Dr Caralee McLiesh, Treasury
Certainly, the minister will not decide who is subject to lending constraints. Speculators, investors, first homebuyers – those targeted constraints will be a matter for the Reserve Bank and the lenders it supervises to decide.
The Reserve Bank is not reassured.
“Operational independence is crucial in the deployment of macroprudential tools as their implementation can often be unpopular (eg constraining credit at the upward stage of the business and credit cycle),” the bank says in the Cabinet papers. “Providing for the Minister to act on a recommendation from the Bank, thereby relying on the specialist technical expertise of the Reserve Bank, helps insulate the decision-making process from undue political pressures.”
“The ongoing Phase Two Review of the RBNZ Act is an opportunity to ensure that the RBNZ has adequate operational autonomy and a sufficient degree of flexibility to respond to financial stability risks by having the full macroprudential policy toolkit at its disposal.”
– International Monetary Fund report
The Reserve Bank wanted the Minister to have more constrained regulatory powers, akin to his existing powers. That would be a requirement that the Minister of Finance could make regulations defining or changing the scope of lending standards only in accordance with a recommendation of the Reserve Bank.
It said International Monetary Fund officials, conducting an Article IV review of New Zealand, shared the bank’s view. This was the Government’s chance to ensure the Reserve Bank had “adequate operational autonomy and a sufficient degree of flexibility” to respond to financial stability risks by having the full macro-prudential toolkit at its disposal, the officials’ concluding report said.
But Robertson preferred the Treasury view – that elected Ministers should be able to regulate lending markets that affect the distribution of wealth in the economy – and his Cabinet colleagues agreed with him.
The “paramount” importance of protecting the Reserve Bank’s operational independence was the first identified priority.
But delegating powers to the Reserve Bank to respond to financial stability risks had to be weighted against the democratic legitimacy established through elected MPs’ legitimate interest in the potential distributional effects of the lending markets, Treasury advised. “This issue would be particularly salient if the Minister of Finance decided to restrict the scope of lending standards.”
Finally, it highlighted the importance of flexibility (that prudential rules should be set in delegated legislation to allow quick responses to financial stability risks), accountability and transparency. “Operational independence and delegated decision-making for regulators should be balanced by accountability for their actions and transparency of their rules and decision-making processes,” Treasury advised.
“This new Act will broaden and clarify the scope of our role, which has evolved significantly since the Reserve Bank began prudentially regulating banks more than 30 years ago.”
– Adrian Orr, Reserve Bank Governor
Secretary of the Treasury Dr Caralee McLiesh said the Reserve Bank Act review was a highly successful collaboration. “The enduring relationships and collaborative processes we have developed provide a very strong basis for working together closely in the future on macroeconomic and financial policy,” she stated.
“Financial stability helps protect New Zealanders’ savings, reduces the risks of unemployment, and enables confident participation in the financial system. The Bank will continue to independently set prudential policy, subject to strengthened accountability and transparency requirements and a requirement for it to have regard to the government’s Financial Policy Remit.”
How this manifests in the real world
Number 75 Oakdale Rd in the Auckland suburb of Hillsborough is unprepossessing. The guttering is bent and battered, the woodwork is faded and the concrete is stained. The vendors describe it as three bedrooms, which may be a bit of a stretch given one of the bedrooms is essentially a hallway with a single divan squeezed behind the back door, for illustrative purposes.
But at an open home at the weekend, Ray White real estate agents had 30 groups through in half an hour – nearly 100 people, agent Martin Honey reckons.
The market, he insists, is still busy with first homebuyers and other owner-occupiers, he says, despite the Government’s attempts to dampen investor demand.
He’s just worried that investors will begin dumping their properties on the market, slowing the rise in house prices but also exacerbating the crisis for renters struggling to find homes.
First, the Minister announced changes to the Reserve Bank’s remit requiring it to pay heed to Government housing policy. Then, he announced legal changes to the relationship between the minister and the bank.
These combine to show a Government that believes it should have a greater command of the economy.
But this is over the long-term – it is expected that the minister’s new regulatory powers won’t finally come into force until 2026. Andrew Bayly says that if he gets his way, he may be the first beneficiary of the new powers! And indeed, he is careful to not oppose them wholesale; he simply says that the new relationship should not have been decided without cross-Parliamentary consultation.
That longer term view suggests this is not a ministerial fiat. Robertson is not trying to seize control in a personal battle with the Reserve Bank Governor.
Rather, these changes do provide greater transparency. They do more clearly delineate the roles of an operationally independent Bank and a Government that expects to flex its muscles to influence distribution of wealth in the economy.
The Treasury argues there is a legitimate interest of elected representatives to influence the appropriate scope of lending standards given their potential distributional effects.
Adrian Orr commented on the new protections and regulation of institutions that accept deposits – but his comments might equally apply to the clarification of Bank and Ministerial powers over regulating the critical lending markets.
“This new Act will broaden and clarify the scope of our role,” he said, “which has evolved significantly since the Reserve Bank began prudentially regulating banks more than 30 years ago.”
