Andrew Little has moved on from wanting to “stiff-arm” banks over dairy foreclosures, to talking of the possibility of legislating to force banks (and other lenders?) to pass on in full any OCR changes.
It isn’t the oddest idea in the world – and personally I find the new talk of a Universal Basic Income, much as it has also been propounded by some on the right, including Milton Friedman, rather more consequential, and worrying. Many quite sensible countries set fixed exchange rates.
For 15 years in New Zealand – 1984 to 1999 – we didn’t have a government agency setting interest rates at all. For much of that time, many of us at the Reserve Bank thought that was only right and proper. And when we first proposed an OCR-like system, many of the leading economics commentators and bank economists were pretty dismissive. But in 1999 we simply concluded that – like most of the rest of the advanced world – it made more sense to set, or manage directly, an official interest rate. And now that model is just taken for granted.
Of course, setting the OCR isn’t the same as setting the individual interest rates for each borrower, but I’m sure that if he gave it any thought that isn’t what Little means either. Perhaps he just means that the Reserve Bank should be able to direct set some commercial bank base lending rate against which all other lending rates have to be calculated? It seems administratively cumbersome, and perhaps prone to being circumvented – not unlike much other government regulation, including (for example) direct restrictions on mortgage lending of the sort once unknown in New Zealand but now imposed by the Reserve Bank and accommodated by the current government. And it is not as if governments universally eschew price-setting in other markets either – the government recently proudly announced an increase in the regulated minimum price for labour, talking of wanting to push that price (once just a market price) up as fast as possible.
One of the attractions of an OCR-type arrangement is that it is a fairly indirect instrument. The Reserve Bank can put the OCR pretty much wherever it needs to to deliver on an inflation target. That is an imprecise linkage, but it works pretty well (at least if the Reserve Bank is reading underlying inflation pressures correctly) and it does so without needing lots of direct controls or impinging very directly on anyone’s business or financial affairs. The OCR is simply the rate the Reserve Bank pays on deposits banks (and any other settlement account holders) have at the Reserve Bank, and the rate at which the Reserve Bank will lend to banks on demand (against good quality collateral) is pegged to the OCR. The amounts banks borrow from and deposit with the Reserve Bank aren’t that large : bank balance sheets total almost $500 billion, and bank deposits with the Reserve Bank are fairly stable, currently around $9 billion. And yet changes in the rate paid on these balances, which don’t move around much, provide substantial and sufficient leverage (partly signaling, partly a change in pricing on one component of the balance sheet) for macroeconomic stabilization purposes. It isn’t a mechanical connection, but it works.
A variety of other models might too, but the judgement has been – not just here, but in other similar countries – that an indirect approach like the OCR is less intrusive and has fewer efficiency costs than the alternatives.
And it is not as if there is some obvious problem. Here is a chart, drawn from data on the Reserve Bank website, showing floating residential mortgage interest rates and six month term deposit rates since 1965. (It is an ugly chart because the mortgage rate data are monthly throughout, but the term deposit rates are quarterly until 1987).
Largely, lending rates reflect deposit rates (and to some extent vice versa). These aren’t perfectly representative indicators, just what we have. But for the almost 30 years for which we have the full monthly data are available, the average spread between these two series was 2.45 percentage points, with a standard deviation of 0.6 percentage points. The latest data are for February, and the spread was 2.49 percentage points. One would expect spreads to move around a bit – demand for individual products ebbs and flows, and the links between foreign funding markets and domestic term deposit markets aren’t instant or mechanical – and they do, but there is no obvious or disconcerting trend.
Through the period since 1965 we have had all manner of regimes. Direct controls on lending rates, direct controls on deposit rates, indirect controls on one, other or both, no controls at all, and then for the last 17 years direct control of the interest rates on one small component of bank balance sheets. Go back far enough, and during the 1930s a conservative government legislated to lower all lending rates. But it just isn’t obvious that there is any need to change the operating system now.
To a mere economist, it is a bit of a puzzle what Little is up to. No doubt the Opposition needs to be seen to be offering alternative policies, but these issues (bank lending rates and dairy foreclosures) don’t seem like an area where there is a substantive policy issue (while there are many other areas of policy where the same could not be said, such as New Zealand’s continuing slow relative decline). But there does seem to be quite a strain of anti-bank sentiment in New Zealand – perhaps especially anti foreign banks, the same sentiment that gave us state-owned Kiwibank under the previous Labour-Alliance government. Perhaps people on the left here are looking to the US and the striking degree of response Bernie Sanders is achieving for his populist message, much of which is centred on an anti Wall St message?