The Reserve Bank Governor stands by his decisions during and after Covid-19, saying the economy could have turned out far worse, while also criticising investors who had taken advantage of cheap lending to buy more property.
Adrian Orr spoke to Q+A ahead of Treasury’s next forecast in a fortnight, which is expected to show weaker-than-expected economic activity, leading to a delayed recovery.
Meanwhile, despite average house prices nationwide having fallen from their peak in 2022, asking prices are still much higher than in 2019 and remain unaffordable for many.
Watch the full interview on TVNZ+
When asked if he regretted his decisions over the past few years, Orr said the Reserve Bank had to keep money flowing through the market and businesses during the pandemic. This was through “unconventional” monetary policy — such as Large-Scale Asset Purchases (LSAP, bond-buying commonly described as money printing) and Funding for Lending Programme (FLP, which allowed commercial banks to borrow more cheaply from the Reserve Bank) — as well as “conventional” OCR cuts.
“We had to take [the path of] least regrets because the alternative was horrendous. One of deflation, significant depression, considerable job loss, and chaos,” Orr said.
“People love to talk about the current cost — but what they don’t see is the alternative.”
Unemployment has risen to a four-year high, business insolvencies have doubled since last year, and the Reserve Bank warns geopolitical uncertainty could mean more volatility.
Some have suggested the Reserve Bank could have done more to help the economy. The central bank has been criticised for being too slow to stop stimulating the economy through monetary policy — contributing to high inflation — and for being sluggish in cutting rates once things had slowed down.
NZ’s ‘infatuation’ with housing market
There were also warnings as early as January 2020 that money printing would increase house prices and deepen inequality.
“What people went and did with that money is a disappointment,” Orr said of the cheap lending environment during the pandemic’s height.
“Too many people saw that as an opportunity to punt or stag the property market. Other people used the cash flow to stay in business or stay afloat as human beings.”
Orr said part of the “infatuation with the housing market” was media-driven.
“I can’t open a newspaper… or go online or see TV news without some reference to house prices. Since we started talking about reducing the official cash rate, house prices came back in.
“I understand it. I don’t blame the media. It’s the structure of the New Zealand economy — well over two-thirds of household wealth is equity in a home.
“We see it far too much as a means of investment, rather than just a place to live. So, we have one of the most expensive housing markets in the OECD.”
It’s not the first time Orr has criticised property investors. In early 2021, as the Reserve Bank held the OCR at a record low 0.25%, Orr told would-be investors: “Housing is not a free lunch.”
“It’s just another investment asset and it won’t always be your best investment asset. Think hard around the uncertainties and risks you are taking on thinking that more and more houses is a good idea,” he said at the time.
In a 2022 self-assessment, the Reserve Bank said: “With the benefit of hindsight, it appears that monetary policy should have been tightened earlier in 2021.”
It said its use of LSAP and FLP “contributed to higher-than-otherwise economic activity and inflation in the economy during the Covid-19 pandemic”.
“Likewise, in hindsight, the Committee could have raised the OCR earlier. Importantly, however, beginning the monetary policy tightening earlier in 2021 would not have fully offset the strong inflationary impulse stemming from a series of supply shocks, including Russia’s invasion of Ukraine.”
Q+A is made with the support of NZ On Air