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The Nation: Reserve Bank Governor Adrian Orr

On Newshub Nation, Saturday June 2nd: Lisa Owen interviews Reserve Bank Governor Adrian Orr

Lisa Owen: Adrian Orr took up the role of Reserve Bank Governor in March this year after a long stint as chief executive of the New Zealand superannuation fund. Shortly after joining the reserve bank, he spoke about his frustration at the super fund not being able to invest in the Christchurch rebuild. I asked him how he feels about plans for the fund to invest in light rail in Auckland.

Adrian Orr: I think any opportunity to be able to invest in infrastructure for third-party capital is welcome. My frustration was taken out wrongly. It wasn’t about Christchurch per se; I used that as an example. It’s a global challenge to find the ability – you know, large pension funds, the Super Fund. Really, really hard to be able to invest into infrastructure. So we’re in this funny situation with a big infrastructure deficit.
Lisa Owen: Yeah, they want money.
Around the world, this massive capital surplus trying to get into these types of investments, and it’s people that get in the way. We have this hang-up about third-party capital. And so it means that councils, governments rely on debt and tax rather than equity.
Why do we have a hang-up?
I think there’s a fear of control. But there’s property rights; you can lease a building and use it for whatever you like. That’s why governments don’t tend to do that more. You can build a road; you can toll a road. Politicians are scared to use the word ‘toll’ – you know, user-pay-type things. The user always pays. It’s either directly or very indirectly, through the tax system.
So do we need to get over that?
We truly need to get over it. And when I say ‘we’, globally. I sat on a stage last year at the World Bank in Washington with the good and the great. The African nations – the emerging markets – are all screaming for capital. They’re saying, ‘Why won’t you invest?’ And I said, ‘Well, show us the deals.’ And so it is a political economy problem, not an investment or economic problem.
Okay. Well, speaking of politics, after you made those comments, the National leader, Simon Bridges, suggested that you should stay out of political debates.
I am out of political debate. That is an economic point. We’re saying, ‘Economically, why aren’t you investing? This makes sense. These can make sense,’ so it’s absolutely fine. What I did was I reminded– Because I’m not stepping back from that. I spoke directly to Minister Gerry Brownlee – or, sorry, Gerry Brownlee – just to say, ‘Apologies. No personal offence intended at all.’ In fact, I was talking very positively about him.
So you doubled down on your comments, didn’t you?
Well, doubled down in a sense that part of my mandate is to contribute to maximising sustainable employment. That means having an efficient economy. It means having investable opportunities. You know, the light rail itself, subject to the maths, should stand on its own feet. But the wider economic benefit that that then brings to all of the businesses – corridors, productivity, you know, rather than sitting in cars – these things are incredibly important for maximising sustainable employment.
Well, you talk about that, and I want to talk about it. What’s the sweet spot? Because there could be some conflict there, couldn’t there, between that and inflation. Where do you think the sweet spot is between the two?
I would say that the sweet spot, to be honest, is probably—They are aligned 99.9% of the time in the sense of if you’re trying to maintain low and stable inflation, then a key part of that is making sure you don’t have excess demand or supply in the key markets. One key market is the labour market.
And so if inflation’s running too hot and we have to lift rates, well, part of it will be reflected in the employment game as well.
What’s the magic number for unemployment, then, that takes you to the happy place?
We don’t have a magic number. That is the real challenge, and, by the way, there never will be, because there are so many things other than monetary policy that impacts on employment.
So is it a totally unachievable goal, then, if there’s no number?
No. It’s contribute to maximum sustainable long-term employment, so there is some long-term sense. There’s a natural rate of unemployment, which is how many people are actually actively looking for jobs but don’t have the skills or meet— there are inflation rates of unemployment. There is the amount of people actually in the labour force – people willing to work.
But you’re a smart man; you must have a number in your head around about where you think it falls.
We published in our Monetary Policy Statement quite a range of different measures, and we purposely did that because we are calling out for assistance. Across the good and great, we don’t have the monopoly on knowledge. We’re saying, ‘Hey, look, here’s half a dozen reasonable measures of employment levels,’ and we showed the band there was somewhere, anywhere, between— There was probably about a 1 per cent unemployment-rate difference between some measures, or employment-rate difference around what is maximum. And we said, ‘Here’s a mid-point. Here’s a range. Come and talk to us about how—’ They all tend to move together, but there are different drivers.
All right. Well, let’s move on to whether we need a Royal Commission into Banking Practices. Now, you’ve said that you don’t think we need that. But Australian leaders thought the same thing, so how can you be so sure we don’t need it?
The important part here was we need to do the work we are doing – ‘we’ being the Financial Markets Authority and ourselves, the Reserve Bank. We are very, very embedded in these banks, looking at their governance, looking at their consumer care, looking at their remediation efforts for bank complaints. That work is necessary. At the end of that work, we may be able to say, ‘Now is a Royal Commission necessary or not?’
So you’re leaving the door open?
I, well—
Depending on the outcome of that initial work. I know you don’t call it; you’re not the one who gets the ultimate say, but you could make a recommendation, so you’re leaving that open.
That is right. That’s right. I mean, our recommendation might be, ‘Hey, there needs to be legislative change here,’ or, ‘Hey, we don’t believe we’re getting the real oil that’s going on.’
Do you think you are getting the real oil?
To be tested. We have a very good insight into the banks anyway, and the insurance, but what we’ve done is we wrote to all of the banks and said, ‘Please explain across these areas what you’re doing with regard to your conduct and behaviour.’ And we’ve got those essays back. We’ve had our first prelim—
But not everyone responded, did they?
We asked 10 specifically to write, and they all responded. An 11th offered it up. So we went first of all just to the 10 large banks – and we did that deliberately, because you know it’s the best place to start – four of which were Australian.
So what have they told you, and do you believe it all?
We are going to be getting right under the skin, because they’ve told us—It’s a mixed series. The larger, more sophisticated banks have given us big essays. They’ve had a lot of practice from years and years—I think there’s been 55 investigations in Australia on different practices. So we’ve got a pretty clear guide as to where we now need to lift the lid and see, ‘Well, they said this; is it real? Show us how it happened in practice.’ We need to be talking to staff, to customers, to chairs of the boards, and that’s what we’ll be doing over the next few months.
So you’re not just taking their word for it?
No, far from it.
Which lid are you lifting? What areas will it be specifically, do you think?
Across the four main areas – that is around, I suppose, governance – how serious are the boards about understanding conduct and behaviour; and how does good news and bad news travel up to them; and are the policies being put in place. There’s the actual code of conducts within the management teams – how are they incentivised to sell, to behave, and—
So are they giving bogus advice to get their numbers up?
Well, in some cases, that is clearly conflicts of interests if they have to sell more and more products to people who don’t need them. By the way, this is across many industries.
Well, 75% of cases in Australia that are before the Commission were found to be giving unsound advice, obviously giving advice that benefited them, because they were selling products. Do you think that’s an issue here in New Zealand?
I think there will be some of those issues. I would say that’s what the banks are working on. Are they working on it quick enough, deliberately enough? The FMA put out some conduct guidelines. There was a Sedgwick report that came out—
So do you think it’s widespread, or do you think--? Because there’s been talk – one-off, individual’s behaviour. But when it comes to that—
All the indicators we have at the moment is it’s not widespread. By the way,…
Even when it comes to financial advice?
…so there’s the conduct—Financial advice, I’d say, would be one of the trickiest areas. One of their main concerns, to be honest, around financial advice is that people don’t get enough of it. It’s very hard to access, and banks are very good at delivering it. They’re one of the few places with the economies of scale, scope that they can afford to provide the advice. So we need to tread really carefully there. We don’t want to say, ‘Hey, stop providing advice,’ because then there is none. So it’s about – how do you get good advice out there, non-conflicted with the products? And that’s all around the conduct behaviours we’re looking at. Is it perfect yet? No.
Okay. Very quickly, the two other areas; you said there were four.
Yeah, so their consumer focus, I think, is a really, really important one. We touched a little bit on that. But just – how is the consumer being treated? What is their overall experience? And the last one is remediation. If I’ve had a problem, who do I go to? Am I treated fairly? Is it happening? Across those two, particularly the remediation, there’s very low measurable indicators of problems – you, know, the Banking Ombudsman. It’s nothing like in Australia. I don’t know if we just complain less or if it’s buried more. And so that’s what we want to find out. The measures say it’s not an issue. Is it not an issue because we’ve just given up complaining?
Or is it not an issue because they are being well dealt with?
So you’re leaving your options open in that regard. I want to move on to mortgages – income-to-debt ratios for people holding mortgages in your Financial Stability Report. It’s topping up to nearly 350 per cent for mortgage holders. That sounds scary to me. Does it scare you?
Yes, it does. And, you know, we shout out, ‘Hey, we’re scared.’ That’s why we put in a regulatory impost – this loan-to-value ratio. But households… Looking from the baking sector, wearing my banking hat, the banks are very well capitalised, highly liquid and very diverse, so it’s not a systemic risk to the banking. Looking from the consumer side, understand leverage is very, very high, and prices do fall just as they rise. And so—
How many people are at risk of tipping over? And what’s the pinch point in an interest that would push them over the edge?
So, we’ve done lots of scenario tests. The good news is that it’s a very low-interest-rate environment. The thing that tips people over is unemployment – if they’re without an income.
So how many are at risk, do you think?
Well, it just depends on what happens to the employment. And it’s not a big proportion, but it becomes herd in market behaviour. If someone tips over, then they start selling. Our biggest concern, I’d say, was in the investor market. This is where people—
So people buying second homes for rentals?

Yeah. This is where people have five times their income leveraged in these mortgages, and you’re saying, ‘That is just too high.’ And that’s why we put a very high loan-to-value ratio restriction on the investors, and that’s worked. It’s disappointing that we have to do that. You know? Why are banks lending at such an extreme level?
So it should be them that puts the handbrake on – not you?
Well, in an ideal world, if banks are thinking over the long-term, sustainable customers, you know, they want you to—
So their lending is dangerous, is it?
Their lending practices can get dangerous, yeah. And that’s why regulators exist.
So are they acting irresponsibly?
Well, that’s going to be part of our question as well – how responsible are your lending practices? And at times, we know that they haven’t been responsible. You know? We’ve had a global financial crisis recently.
But are they still being irresponsible?
It seems to be seasonal. People get excited; we forget the last crisis; and then we go back to very high credit growth. More recently, people have become, in the banks, far better behaved. So credit growth has slowed a lot, but a lot of that is because we’ve made it happen as opposed to it happening naturally.
Talking about the LVRs – the loan-to-value restrictions – and you say that they’re having some influence, but have they had any influence on the price of a house?
No. But house-price growth has slowed, so they’re probably indirect, i.e. it influences credit growth,…
…and it means if credit is harder to get, well, then there’s going to be less demand for housing, and hence house prices should ease. And we have seen house-price inflation easing. It’s gone from double digits down to low single. We want to see house-price growth remain at a much slower—and take the pressure out.
Do you need to be putting the screws on harder, then, rather than considering easing LVRs over the next, what, 18 months?
So, it’s forward-looking. We’re saying, ‘Hey, if the trends and inflation pressure comes out of the housing and, more importantly, if credit growth remains very low and measuring, basically, income growth, then over time, we may be able to remove the LVRs.’ But our nervousness is – if we remove them, do banks just go back to pumping the credit again? So we need to get confidence.
So around that, then, will KiwiBuild properties be exempt from LVRs?
I can’t answer that, sorry.
What do you think?
Why can’t you answer it?
Because I don’t know the answer.
Right. So, but pondering it now, what are your thoughts?
Uh, exempt.
Exempt them?
I would be thinking if you’re trying to get low-income families into homes and whatever, so…
Won’t you just throw fuel on the fire?
It’s about adding supply, not demand, so that’s what I’m saying. If it’s about getting housing out there very quickly and having people able to access them – people who should be in that access space. So whether it’s an LVR exemption or some kind of income restriction or whatever, if the aim is to get affordable houses out there to people who can’t afford them presently, then make them affordable.
Great to talk to you. Thanks for joining us this morning. Much appreciated.
Thank you.

Transcript provided by Able.

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