The NZ Official Cash Rate (OCR) is broken and has been outdated for decades.
Generally OCR increases announced by the Reserve Bank of New Zealand (R.B.NZ) increased NZ Bank profits. Banks have been borrowing long off shore at cheaper rates for decades to fund generally shorter term fixed mortgage interest rate lending.
An increase in the OCR has become an invitation issued by the RBNZ for NZ Banks to unilaterally increase their interest rate margins and profits based on the a illusion that the cost of their longer term internationally raised lending fund pool somehow magically increases in line with the NZ OCR. This misrepresentation trumpeted by the RBNZ that an increase in the OCR will somehow increase the cost of funds to NZ Banks, borrowed often in ten year blocks off shore at cheaper rates, has become a misrepresentation and deception on the New Zealand public.
Solution, regulate to require NZ Banks to put a interest rate percentage into a Borrower Bonded Account (B.B.A.) held on account of the borrower. This bonded account would form part of the Banks security for the term of the mortgage and can be applied to reduce the individual Borrowers principal when the mortgage is repaid. The required interest rate percentage to be paid into each Borrowers individual bonded account could be set by the RBNZ at the same time that they review the NZ OCR.
This would have the affect of immediately increasing the Banks cost of funds as the OCR increases. If Banks are seen as being noncompetitive in bringing interest rates down as the OCR decreases, the Reserve Bank could order that a percentage of the interest rate charged to borrowers is paid into Borrowers bonded bank accounts. Once the RBNZ is satisfied with NZ Bank margins on borrowed funds and interest rates charged, the percentage put into the BBA could be adjusted in the six weekly review.
By this method, the NZ Official cash rate is returned to its base function of increasing or decreasing a Banks cost of funds and not simply adding to their profit margins at a time generally when all Borrowers and the NZ public are having to tighten their belts.
In the past, NZ Banks have escaped any OCR system review once interest rates start falling. This time lets unite and demand that the OCR mechanism be fixed and brought into the 21st century.
A reply from the RBNZ defending the current OCR structure is attached below. It is however noted that the RBNZ has not commented or defended NZ Bank margins in our initial proposal to put an interest rate percentage into a kiwisaver locked account. The time is now to push for changes to make the NZ OCR system fairer for all NZ borrowers and the NZ public in general.
Kia ora Dave,
Thank you for your email regarding the Reserve Bank’s monetary policy and the suggestion about the Official Cash Rate (OCR) V Kiwisaver.
While changes in the OCR are ultimately linked with the amount of money in circulation, the main way these changes affect economic activity is through altering the incentives individuals face, now and in the future. For example, a higher interest rate today encourages households to save more and consume less, with flow-on effects to soften overall economic activity and inflation. Importantly, while this is a net effect across the whole of the New Zealand economy, individuals are still able to react to changing interest rates in whatever way they feel is best: for example, some may still choose to borrow at higher interest rates if they find themselves in a position to do so.
Your Kiwisaver proposal intends to provide a more direct mechanism to boost (or lower) saving and reduce (increase) disposable income and subsequently demand, effectively by ordering an increase (decrease) in retirement savings. In reality, it is likely that people will simply reallocate from other forms of saving into Kiwisaver (as directed), rather than necessarily increase their savings overall. This would reduce the policy’s effectiveness. In addition, the proposed policy focuses on the saving and investment channel of monetary policy. As outlined in Chapter 4 of the November 2023 Monetary Policy Statement, there are multiple channels through which monetary policy operates, all of which are important in enabling the Bank to meet its economic objectives.
Nonetheless, stabilizing the business cycle through such an instrument aligns with the broad literature on fiscal stabilization. This literature has examined the potential role for a variety of instruments in managing the economy through unforeseen circumstances, in manners both discretionary and mechanical. Such instruments include variable tax rates, lump sum transfers, retirement schemes, sovereign wealth funds and others. While the current evidence is mixed on the effectiveness of these tools for the purposes of keeping the economy on an even keel, (macro stabilisation), the potential for large and diverse economic shocks and monetary policy to be constrained at the effective lower bound, when official interest rates are close to zero, suggest there may be a role for such levers at a broader government level.
While the above noted literature makes clear the potential for a wide variety of instruments to contribute to macroeconomic stabilization, we nonetheless need to choose how to operate monetary policy. Experience within New Zealand as well as through much of the developed world over the past several decades strongly suggests that there is a robust channel from changes in the OCR through to inflation. Monetary policy can best promote overall welfare by using this channel to maintain low and stable inflation. While it is true that higher interest rates will make borrowers worse off, all else equal, monetary policy is a blunt tool. It is likely that other government fiscal and banking lending (prudential) tools are better suited to managing redistribution and overall financial risk in line with the government’s broad objectives.
As we said in the May 2024 Monetary Policy Statement, restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation. While weaker capacity pressures and an easing labour market are reducing domestic inflation, this decline is tempered by sectors of the economy that are less sensitive to interest rates.
Monetary policy is working, as expected, to lower inflation. We remain confident that CPI inflation will return to the 1-3 percent target band, by the end of 2024, and to 2 percent in mid 2026.
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