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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. Rates are on the

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Speaker 1: way down alongside measured inflation, while unemployments and business insolvencies

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Speaker 1: are tacking up. This is the situation the Reserve Bank

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Speaker 1: engineered through monetary policy, So what has it learned about

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Speaker 1: the impact it can have.

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Speaker 2: We've been confident through that period that monetary policy is working,

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Speaker 2: it's doing its job, it's panning out. The uncertainties have

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Speaker 2: been around the speed and intensity of that.

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Speaker 3: The Reserve Bank has officially started to loosen its grip

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Speaker 3: on the economy.

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Speaker 4: Reducing the official cash rate to five point twenty five percent.

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Speaker 3: It was the first cut since twenty twenty. Rates have

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Speaker 3: been on a roller coaster arrived since then as the

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Speaker 3: Reserve Bank tried to get inflation under control, with the

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Speaker 3: ocr going from a record low in twenty twenty up

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Speaker 3: to the highest level since two thousand and eight and

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Speaker 3: the space of two years. As a result, we're in

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Speaker 3: a recession according to the Central Bank's own updated projections.

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Speaker 3: Unemployment is ticking up and hundreds of businesses have gone

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Speaker 3: and solvent in the past few months. The market saw

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Speaker 3: all this coming. It was heavily pricing in interest rate

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Speaker 3: cuts ahead of the Reserve Bank's move. It's now expected

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Speaker 3: to keep going. The Central Bank's forecast suggests the ocr

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Speaker 3: will fall to three percent by twenty twenty seven. Such

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Speaker 3: decisions are made in this room in Wellington, where the

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Speaker 3: Governor spoke to me earlier this year, including about how

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Speaker 3: its own decisions contributed to what our economy has endured.

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Speaker 4: Central banks globally, including US, as well as fiscal authority

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Speaker 4: is humped money in to keep jobs and livelihoods going

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Speaker 4: as we work through that period of extreme uncertainty.

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Speaker 3: While the Reserve Bank is easing off the gas in

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Speaker 3: regards to rates, it's adding tougher restrictions on mortgage lending.

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Speaker 3: Could that mean it's concerned about the stability of our

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Speaker 3: financial system given how hard it's been tested, I asked

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Speaker 3: the Deputy Governor, Christian Hawksby. At the Financial Services Council

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Speaker 3: and your conference and Lawlands, you sit on the Manager

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Speaker 3: Policy Committee. You've been with the Reserve Bank for a

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Speaker 3: while now. You've been at the forefront of some of

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Speaker 3: the biggest momentous decisions. And Christians also told me that

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Speaker 3: nothing is off limits today, so I'm very excited for this.

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Speaker 5: Can I just get a show of hands? First? Who

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Speaker 5: he has a mortgage?

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Speaker 3: And it's a bit of a personal question, but you're

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Speaker 3: all in financial services, so it's a.

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Speaker 5: Crime if you don't have one.

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Speaker 3: Wow, looks like about ninety percent of the room on

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Speaker 3: behalf of all of those hands. Christian, thank you for

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Speaker 3: cutting the official cash rates. We have the data sure,

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Speaker 3: everyone who put their hand up is very grateful. We're

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Speaker 3: going to discuss that decision in more detail, but also

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Speaker 3: I want to talk about what everything that the Reserve

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Speaker 3: Bank has been through over the sort of rollercoaster ride

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Speaker 3: with rates and crudential tools, and ultimately what the banks

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Speaker 3: learn from it. But first of I can sort of

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Speaker 3: paint the picture of the system and.

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Speaker 5: Where it's at right now.

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Speaker 3: We had record mortgages in twenty twenty one, A number

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Speaker 3: of those, a significant amount of those were also at

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Speaker 3: six times people's income. We've had a tripling in retail

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Speaker 3: interest rates since then. Now we have the tick up

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Speaker 3: and unemployment slight tick up and defaults and increased business dissulgencies.

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Speaker 3: How stable is the financial system given all of that, Christian.

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Speaker 2: Well, you've just given me a plunt for our Financial

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Speaker 2: Stability Report which is out in November, which covers all

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Speaker 2: of that ground. We think the financial systems in a

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Speaker 2: good position it is are resilient, and we've done a

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Speaker 2: lot of work through time to build up that resilience.

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Speaker 2: You know, if I was at this conference a few

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Speaker 2: years ago, I've been talking about the Capital Review and

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Speaker 2: the way that we were building up capital requirements and

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Speaker 2: liquidity requirements for the banking system, implementing macro prudential tools

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Speaker 2: like the loan to value restriction and now the debt

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Speaker 2: to income restriction as well. All of those things have

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Speaker 2: been about building up resilience in the financial system so

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Speaker 2: it can weather these ups and downs, because we will

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Speaker 2: go through economic cycles along the way. What we've been

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Speaker 2: really pleased about is the way that financial institutions have

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Speaker 2: used that resilience to stick with their customers through those

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Speaker 2: ups and downs and communicated very early about if you're

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Speaker 2: having problems, come and talk to us, we can work

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Speaker 2: with you. There are things that we can do. We

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Speaker 2: think that that's one of the benefits that comes from

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Speaker 2: building that resilience through time.

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Speaker 3: What you're very focused out at the Central Bank as well,

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Speaker 3: is this balance between resilience and competition. I think it's

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Speaker 3: fair to say we're pretty lucky to have quite a

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Speaker 3: resilient financial system through everything that we've been through. But

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Speaker 3: this government now is pretty help bent on increasing competition

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Speaker 3: in the banking sector, especially after the Commerce Commission's.

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Speaker 5: Most recent reports.

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Speaker 3: How will that shift the balance between resilience and competition

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Speaker 3: and everything else you have to keep in focus.

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Speaker 2: Yeah, I mean it's a great question, and we've been

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Speaker 2: very engaged in the Communce Commission's market study, both at

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Speaker 2: a draft level and and the final report that's come

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Speaker 2: out as well. I think, just in terms of the

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Speaker 2: structure of the banking system and the financial system that

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Speaker 2: we're at it, there are a lot of returns to scale.

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Speaker 2: So being big as a financial institution does give you

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Speaker 2: a competitive advantage because you can spread those costs of

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Speaker 2: operating over a much wider customer base. So just inherently,

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Speaker 2: I think the system is one where there is an

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Speaker 2: advantage to being big, and it is an advantage from

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Speaker 2: scale as opposed to anything else. What we're looking at is,

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Speaker 2: as it chatted about you know, where is it that

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Speaker 2: we can on the margin promote our competition as well.

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Speaker 2: Where can we push ourselves to think do the rules

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Speaker 2: need to be the same for different types of institutions.

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Speaker 2: So just to bring this to life at the moment,

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Speaker 2: we're consulting on the Deposit Taker Act, one of the

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Speaker 2: things is the minimum amount of capital that you need

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Speaker 2: to even be a deposit taker at the moment, well,

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Speaker 2: under previous rules, as to be a bank you needed

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Speaker 2: at least thirty million dollars capital then to get a license.

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Speaker 2: You know, it's a serious business being a bank. You're

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Speaker 2: taking risks, requires a lot of trust and confidence. We're

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Speaker 2: looking at that now across both banks and non bank

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Speaker 2: deposit takers in consultant with the industry and say what

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Speaker 2: do you think right number is We've put out five

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Speaker 2: to ten million dollars as a starting point for that conversation,

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Speaker 2: and that might be a more achievable level for a

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Speaker 2: startup company that maybe isn't going to provide all banking services,

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Speaker 2: but might provide some banking services. And that's I think

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Speaker 2: that's the way of the future, that there will be

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Speaker 2: different types of financial institutions providing different pieces of what

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Speaker 2: banks do at the moment.

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Speaker 3: Interesting I resilience than big guys. Nothing's too big to

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Speaker 3: fail though, as a Christian.

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Speaker 2: First and foremost, we want to build resilience such that

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Speaker 2: we don't have failures. But we don't have a zero

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Speaker 2: failure regime. We can't guarantee that's not going to happen.

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Speaker 2: So in New Zealand we have a thing called Open

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Speaker 2: Bank Resolution, and we have for the big banks we

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Speaker 2: have outsourcing requirements which mean, hey, make sure that you

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Speaker 2: don't have to rely on your big Aussie parent for

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Speaker 2: everything that you do. Make sure that you can be

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Speaker 2: able to stand alone if you need to. And Open

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Speaker 2: Bank Resolution gives us the tools to shut down a

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Speaker 2: bank and reopen it.

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Speaker 3: As a going concern, there must be at least some

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Speaker 3: level of concern about resilience of the system given what

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Speaker 3: it's been through. Because you are making some regulatory changes

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Speaker 3: of the margin lvrs have been loosened slightly in favor

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Speaker 3: of bringing in new.

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Speaker 5: Debt to income restrictions.

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Speaker 3: Why are you adding new tools into the mix and

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Speaker 3: what impact do you expect them to have?

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Speaker 2: Yeh, We're constantly thinking do we have the right tools

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Speaker 2: for our mandate and the different aspects of our mandate,

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Speaker 2: the different responsibilities we have in regards to the macro

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Speaker 2: prudential tools that you mentioned. Ten years ago, we were

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Speaker 2: a pioneer in the world. We were the first country

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Speaker 2: to impose alone to value restriction, and that followed the

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Speaker 2: experience from the GFC that was all about making sure

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Speaker 2: that borrowers had enough equity in their home such that

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Speaker 2: if house prices fell, they weren't a negative equity and

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Speaker 2: the banks had something as collateral there in that situation

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Speaker 2: roll the clock forward. That's just one aspect of risk

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Speaker 2: from lending through mortgages. The other, more significant one is

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Speaker 2: just the ability to service the mortgage through different states

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Speaker 2: of the world and the future different rules of interest rates,

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Speaker 2: and that's what our debt to income restrictions help us

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Speaker 2: hone in more specifically on what we noticed looking at

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Speaker 2: overseas is that everyone had followed us in terms of

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Speaker 2: everyone else's doing macro potential tools as well, but they

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Speaker 2: were using more than one tool and being able to

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Speaker 2: be more focused, more targeted, more efficient, and enabling them

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Speaker 2: to have less restrictive settings if they get in that space.

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Speaker 2: So we're really pleased that we've got that to hand

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Speaker 2: them think that it's going to be somewhere down the

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Speaker 2: track and the next economic cycle that we face, they're

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Speaker 2: going to be a really important.

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Speaker 5: Part rail well on the economic cycle.

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Speaker 3: And specifically the forecast that you recently released and your

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Speaker 3: monetary policy statement for August, it showed that we are

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Speaker 3: already in a recession and we're going to be in

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Speaker 3: one for the rest of the year. Is that better

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Speaker 3: worse about on par with what you expected? And let's

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Speaker 3: also be clear that that's you know what the Reserve

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Speaker 3: Bank engineer.

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Speaker 2: Right, Yeah, we spent a lot of time looking back

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Speaker 2: at how the economy has evolved, and you know, whether

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Speaker 2: that's been roughly what we expected or not. We actually

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Speaker 2: go back and look at our projections back in November

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Speaker 2: twenty twenty two, and actually remember standing up in this conference.

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Speaker 2: Around that time, inflation was over seven percent and it

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Speaker 2: was a real, really uncomfortable time to be a central

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Speaker 2: banker globally and here in the New Zealand. And what

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Speaker 2: we knew we needed to do at that point was

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Speaker 2: cool demand. We were just in a position where, through

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Speaker 2: that COVID experience, that had all been trying to soften

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Speaker 2: the blow of COVID keep cash flowing, confidence going soften.

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Speaker 2: The blow that response ended up being such that people

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Speaker 2: just kept spending, regardless of the fact that the productive

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Speaker 2: capacity the global economy had been cut back, and so

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Speaker 2: there was all that demand. We need new neck demand

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Speaker 2: needed to slow that. Projections in November twenty two show

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Speaker 2: pretty much a profile like we've seen, which is going

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Speaker 2: from an overheating economy to one where things are better

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Speaker 2: balanced and potentially one where we've got a bit of

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Speaker 2: spear capacity for a little while as things continue to

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Speaker 2: cool down and inflation expectations really anchor back where they

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Speaker 2: need to be. So we've been confident through that period

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Speaker 2: that monetary policies working, it's doing its job, it's panning out.

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Speaker 2: The uncertainties have been around the speed and intensity of that,

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Speaker 2: you know, whens it kind of come through. Have we

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Speaker 2: seen enough yet? And so we're back in our last decision,

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Speaker 2: and August was really getting to that level of confidence

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Speaker 2: that actually have seen enough now we can move into

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Speaker 2: a different zone in terms of where monetary policy is.

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Speaker 3: I wanted to ask you very specifically about that level

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Speaker 3: of confidence because but ahead of that August rate card decision,

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Speaker 3: the market was so heavily pricing that in they were

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Speaker 3: well ahead of what the reserve banks on projections were

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Speaker 3: for the OCR track. Following that decision, the noise now

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Speaker 3: criticizing the Reserve Bank for not moving sooner or at

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Speaker 3: least even indicating that you were thinking about it has

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Speaker 3: been pretty overwhelm overwhelmingly loud. Why did you a not

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Speaker 3: move sooner? Was there perhaps not enough evidence that gave

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Speaker 3: you that confidence? But also why did you not indicate

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Speaker 3: that you were thinking even of moving at the stage?

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Speaker 2: Yeh, So, I'd say through this whole period, we've had

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Speaker 2: a lot of confidence that management policies working, and just

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Speaker 2: because you see it working through the different bits of

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Speaker 2: the transmission channel and it's kind of a sequence that

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Speaker 2: you would expect. So confidence that it was working, confidence

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Speaker 2: that we're on track. But the big uncertainties were really

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Speaker 2: around whether it was going to be slower than we

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Speaker 2: expected in terms of work. Was price setting behavior going

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Speaker 2: to be sticky? Was it going to be slow? Was

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Speaker 2: that going to make our job harder? Were we going

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Speaker 2: to have to do more? And that was the risk

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Speaker 2: on the upside. The risk on the downside was we've

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Speaker 2: done enough, but we just had we haven't seen it

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Speaker 2: come through yet, and it's going to come and it's

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Speaker 2: just ahead of us. So we're really for right through

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Speaker 2: that whole period, we're looking at those you know, are

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Speaker 2: those two risks balanced. As we went into May earlier

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Speaker 2: in the year, your think worst looking stubborn pricing intentions

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Speaker 2: were still high, even though the economy was cooling. That

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Speaker 2: domestic price pressure was still high and was giving us

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Speaker 2: calls for concern. Through the course of June and July,

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Speaker 2: pretty much everything moved at once, So all of those

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Speaker 2: pricing intentions, inflation expectations, headline inflation, all these things came

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Speaker 2: down at the same time that all of the economic

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Speaker 2: activity indicators fell as well. So it gave us gave

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Speaker 2: us that confidence that would reached that level where not

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Speaker 2: only had headline inflation come down to a zone that

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Speaker 2: were confident, but capacity was really coming out of the economy,

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Speaker 2: which meant that in the future inflation would stay down

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Speaker 2: in the future as well. That happened pretty quickly through

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Speaker 2: June and July. In our July Monetary Policy the review,

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Speaker 2: we did change our tone in terms of acknowledging what

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Speaker 2: we were seeing, and we started to talk about how

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Speaker 2: well policy isn't going to be restrictive forever. At some

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Speaker 2: point we're going to have to sort of start moving

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Speaker 2: into a different zone. By the time we got to August,

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Speaker 2: markets were pricing what we ended up doing. There will

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Speaker 2: always be economists on one side or other of the story,

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Speaker 2: and we hear all about that.

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Speaker 3: It's pretty crazy to think that only three years ago

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Speaker 3: the official cash rate had a zero in front of

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Speaker 3: it was at a record low. It feels like a

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Speaker 3: long time ago because look at us now, the average

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Speaker 3: one year mortgage interest rate has.

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Speaker 5: A seven in front of it.

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Speaker 3: Ultimately, throughout all of this, what is the reserve band

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Speaker 3: learned from the cycle? Because tools that were kind of

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Speaker 3: just being tested on paper have now actually been tested

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Speaker 3: in practice. So what have you learned about the impact

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Speaker 3: monetary policy can have and also specifically it's correlation to

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Speaker 3: certain parts of the market and economy, Like, how's it?

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Speaker 2: Yeah, we've done a lot of reflection, as you can imagine,

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Speaker 2: we put out from a legislative point of view, every

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Speaker 2: five years we have to do a review part of

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Speaker 2: what we've learned over that period. Have that externally reviewed.

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Speaker 2: You know, that's been pretty timely given what we've come

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Speaker 2: out of so lots of lessons there, I think that,

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Speaker 2: you know, some of the lessons around the tools are

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Speaker 2: that actually we've got the tools that we need in

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Speaker 2: the sense of a lot of what we did. You know,

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Speaker 2: there were new tools, they had new acronyms, all of

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Speaker 2: that sort of stuff, But ultimately they were about different

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Speaker 2: ways that we can keep interest rates down. And that's

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Speaker 2: what muniture policy is about. It's when stillness is needed,

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Speaker 2: using different tools to keep interest rates as low as

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Speaker 2: you can, when you need to call things, you know,

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Speaker 2: lifting interest rates into a restrictive zone. So to some extent,

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Speaker 2: you know, we know we've got the tools. A lot

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Speaker 2: of the lessons were actually about where we need to

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Speaker 2: build capability, things that we need to understand better into

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Speaker 2: the future if we're in a similar situation again. I

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Speaker 2: think one of those areas is around you know, we're

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Speaker 2: very experienced on the economic cycle, the ups and downs

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Speaker 2: of consumption and investment and all that's our bread and butter,

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Speaker 2: but really having a better capability when it comes to

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Speaker 2: understanding the productive capacity of the economy. What happens when

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Speaker 2: you shut the border is what happens when there are

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Speaker 2: disruptions to supply chains, all of these things which were

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Speaker 2: very very prominent and will be more prominent in the

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Speaker 2: future of climate change and more more disruption to the

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Speaker 2: supply side of the economy. Also building capability and understanding

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Speaker 2: on the impacts of fiscal policy. You know, the think's

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Speaker 2: this approach over the last twenty or thirty years has

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Speaker 2: been that monetary policy is in the lead when it

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Speaker 2: comes to cyclical management of the economy. Fiscal policy just

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Speaker 2: does its thing. The automatic stabilizers kick in, you know,

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Speaker 2: Texas for benefits go up, but you leave the active

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Speaker 2: management to monetary policy. What we learned through the COVID

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Speaker 2: experience is that when you get close to the zero

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Speaker 2: bound on interest rates, monetary policy needs friends and some

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Speaker 2: of your stimulus needs to be really targeted. Then you're

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Speaker 2: into the active fiscal stimulus mode and there's a lot

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Speaker 2: of learning to do in terms of how effective that is,

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Speaker 2: the impact that has, and I think that was probably

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Speaker 2: the big the big lesson through the COVID experience was

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Speaker 2: how potent fiscal policy can be when you have something

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Speaker 2: like the age subsidy that creates that attachment between workers

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Speaker 2: and their employers and gives people confidence to keep spending.

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Speaker 3: Do you think out of that, then the Reserve Bank

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Speaker 3: perhaps needs to obviously you're independent, but perhaps be more

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Speaker 3: vocal on saying.

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Speaker 5: Don't do that, it's going to be stimulatory.

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Speaker 2: What we're looking at more is a research program around

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Speaker 2: fiscal monetary coordination, So working together to understand what those

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Speaker 2: tools are, what their costs and benefits are, the different

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Speaker 2: times that they would be used, sort of building us

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Speaker 2: a type of playbook together of in these different situations.

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Speaker 2: This is what would happen first, this is what would

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Speaker 2: happen second. But through all of that you need to

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Speaker 2: respect the independence of the two organizations. We're independent for

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Speaker 2: a reason, and so that needs to be incorporated as well. Also,

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Speaker 2: you know, it's the Treasury's job to advise the Ministry

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Speaker 2: of the Finance of the day what the fiscal strategy

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Speaker 2: should be or the fiscal response should be. But ultimately

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Speaker 2: that needs to be left with the Ministry of the

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Speaker 2: Finance and the Day to make that. Core.

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Speaker 3: On inflation and specifically inflation targeting, all central banks mostly

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Speaker 3: said that it was going to be transitory. I think

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Speaker 3: we can all kind of clearly agree now that it wasn't.

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Speaker 3: When Gangbusters stayed high for much longer than anybody expected.

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Speaker 3: Some parts certainly now proven quite sticky to remove out

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Speaker 3: of our economy effectively.

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Speaker 5: What's the lesson on the central bank's.

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Speaker 3: Actual ability to a control, a understand inflation and be controlled.

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Speaker 2: Yeah, I think we're all in the same boat in

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Speaker 2: the sense of, you know, we play the cards that

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Speaker 2: were dealt with and what we know at a time,

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Speaker 2: and so we go to the lengths of putting out

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Speaker 2: a projection to say, you know, this is what we

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Speaker 2: know about the economy at the moment. These are the

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Speaker 2: assumptions we're making going forward, and here's our you know,

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Speaker 2: here's our best foot forward in terms of what we

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Speaker 2: think the outlookers and what we need to do. Because

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Speaker 2: of that outlook you know, then things change and we

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Speaker 2: have shops come along, events happen. I think the big

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Speaker 2: lesson over that post COVID experience is just the size

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Speaker 2: and the impact of supply side shops on the economy

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Speaker 2: and what they can do. And we just hadn't experienced

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Speaker 2: that before. The whole economy in New Zealand and globally

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Speaker 2: going into hibernation. You know, people all getting sent home,

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Speaker 2: just the way that that reduces the whole wealth of

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Speaker 2: the globe in terms of producing less things, the way

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Speaker 2: that the supply side disruptions through that period where you know,

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Speaker 2: you go from a period where it's normal to have

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Speaker 2: one ship docked outside Long Beach, Los Angeles, and you

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Speaker 2: went to a situation where there are a hundred ships

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Speaker 2: docked out one outside one harbor in the US. It's

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Speaker 2: just an indication of how disrupted, you know, getting goods

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Speaker 2: and services around the world was so throwing the Ukraine

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Speaker 2: wore all of these things. I think that's been one

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Speaker 2: of the big lessons, is just the impact that the

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Speaker 2: supply side can have on that story. And it's out

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Speaker 2: of our control in the sense we've looked back and thought, well,

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Speaker 2: if we'd moved monetary policy quicker, you know, if we

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Speaker 2: moved a few quarters ahead and got on top of

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Speaker 2: it already having been the first central bad to be tightening,

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Speaker 2: we still would have had inflation with a five or

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Speaker 2: six on the front of it.

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Speaker 5: Well, one percent point is quite a big difference.

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Speaker 3: The difference between six and then seven percenters quite keenly

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Speaker 3: fault on, that's to call it.

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Speaker 2: Yeah, Well, and these are just ballpark figures, and that's

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Speaker 2: assuming that we had perfect full sight, you know that

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Speaker 2: we knew something that we didn't know at the time.

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Speaker 2: But it's to say that we focus on two percent.

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Speaker 2: We've got a one to three percent range. We focus

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Speaker 2: on two percent because that gives us the best chance

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Speaker 2: to stay in that range, simple as that. But that

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Speaker 2: doesn't mean that inflation is going to be never going

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Speaker 2: to be outside that range, because there is. You know,

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Speaker 2: that's just a volatility that we're dealing with. Our job

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Speaker 2: is to get it back and give people confidence that

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Speaker 2: it's going to be anchored around there going forward. And

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Speaker 2: that's what we're seeing now in terms of how inflation

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Speaker 2: expectations have come down, pricing intentions have come down. You know,

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Speaker 2: those surveys are saying that over a five to ten

401
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Speaker 2: year period, people still have confidence that we will be

402
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Speaker 2: anchored around two percent.

403
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Speaker 3: So give us a figure, where is the OCRE going

404
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Speaker 3: to land this cycle free sign.

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Speaker 2: So our projections are that the OCR comes down to

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Speaker 2: somewhere around three percent, and that's because that's what we

407
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Speaker 2: think in neutral OCR setting is over that longer term horizon,

408
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Speaker 2: and that's predicated on everything working, everything coming back to

409
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Speaker 2: where it should over the long run, there being no

410
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Speaker 2: new shocks that come along. You know, all of those

411
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Speaker 2: assumptions that sit there. You know, when you think about it,

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Speaker 2: three percent is the neutral OCR, and we've had the

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Speaker 2: OCR up over five percent to be in restrictive territory.

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Speaker 2: You know, it means that you can quite easily be

415
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Speaker 2: in a world over the next five or ten years

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Speaker 2: where you know, the OCR is back between zero to

417
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Speaker 2: one percent, depending on what's in front of us and

418
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Speaker 2: what we're dealing with at the time. So we need

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Speaker 2: to prepare for those contingencies.

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Speaker 5: The only certainty at the moment is uncertainty. Run exactly

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Speaker 5: beast to be prepared for absolutely anything. Thank you sat

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Speaker 5: for your time, for someone to be been to have

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Speaker 5: you here. Thank you so much. Sh