MNI INTERVIEW: NZ Risks Hard Landing, Ex-RBNZ Official

A former senior Reserve Bank of New Zealand official has said he sees a “real risk” of a hard economic landing in NZ as a result of the central bank maintaining “negative rates” below the rate of inflation.

Arthur Grimes, a former RBNZ Chairman and chief economist, who is now a senior fellow at consultancy Motu Economic and Public Policy Research, told MNI in an interview that with first quarter inflation now at a two decade high of 6.9% and the RBNZ’s Official Cash Rate (OCR) at 1.5%, interest rates in NZ were “still minus 5% or 6% on a real basis.”

EXTRAORDINARY

“This is extraordinary short sightedness,” Grimes said. “It creates a real risk of a hard landing, and why we should never have gotten into this position if policy was being run competently. It is what happens when you let things get out of control.”

Grimes said that based on the RBNZ’s track for the OCR published in February, which had the OCR reaching 3% by September next year, the outlook was for negative real interest rates “for a substantial period of time.”

The RBNZ has raised rates at its last four meetings, the last time by 50 basis points, and is likely to raise them again when it meets on May 24.

“I’ve never seen a negative interest rate being a substantive buffer against inflation, it is actually a pro-inflationary policy,” he said, joining other former RBNZ calling for a quicker return to policy normalisation, see: MNI INTERVIEW: RBNZ Needs Neutral Rates Faster-Ex-Official.

HOUSING AND FINANCIAL STABILITY REPORT

The RBNZ will release its Financial Stability Report next week, and Grimes predicted that as house prices came down after surging an average 27% last year that there would be signs of individual mortgage stress.

“It won’t affect the banks, because they are well capitalised, but on a micro and individual level it is going to cause financial problems for many households after they bought a house at a vastly over-inflated price,” said Grimes.

“Mortgage stress will become an issue into the future, and some individuals will go bust and have to sell their houses and that will raise social issues, and a lot of other people will tighten their belts and reduce spending.”