Graeme Wheeler in his first year as New Zealand’s central bank chief pioneered the use of loan curbs to contain asset prices -- eschewing higher interest rates. In his second, he’s poised to raise rates anyway.
Wheeler is spurring an evolution at the Reserve Bank of New Zealand, becoming the first governor to use lending restrictions and forming a governor’s committee to advise on decisions. To help the economy withstand a strong currency, he also made the authority’s first publicly confirmed intervention in the foreign-exchange market since 2007.
“Before Wheeler arrived, the line was these were things you would do every 20 years or so at real extremes,” said Christian Hawkesby, fixed-income head at Harbour Asset Management Ltd. in Wellington and a former Bank of England official. “He has completely flipped that on its head,” he said, referring to the measures to contain risks from a property boom.
The new macro-prudential tools allowed Wheeler to restrain the biggest jump in New Zealand house prices since 2008 without rate increases that would have strengthened the kiwi and hurt growth in the export-dependent nation. Wheeler signaled this month borrowing costs will probably rise next year as spending and housing investment pick up with economic recovery.
The central bank’s projected track for the three-month bank bill yield shows increases in the first half next year, and there is a 61 percent chance of a rate rise by March, according to swaps data compiled by Bloomberg at 12:05 p.m. in Wellington.
“New Zealand will probably be the first so-called developed economy to be raising interest rates from emergency low levels,” said Alvin Pontoh, a Singapore-based strategist at TD Securities Inc. He expects a rate increase in March.
Policy makers are preparing for an economic recovery even without the additional boost that could have come from a win by Emirates Team New Zealand in the 2013 America’s Cup. A Kiwi victory might have boosted confidence and housing demand in Auckland, home to about a third of the country’s 4.5 million people, as it would have become the venue for the next defense of the sailing title. Oracle Team USA overcame New Zealand’s lead to win the contest this week.
Wheeler, who like his predecessor Alan Bollard was born in 1951, marks one year in his role at the Reserve Bank today after returning to his homeland from a 15-year stint in the U.S., much of it at the World Bank where he watched the subprime crisis unfold. He wasn’t available for an interview for this story, the central bank said.
His focus on containing the currency and using lending restrictions to cool the property market prompted investors to reduce bets that the central bank will rush to raise borrowing costs. The odds of an increase in December fell to 2 percent from 21 percent in late July, according to swaps data.
Wheeler has widened the toolkit for an institution that pioneered inflation targeting in the 1980s, building on Bollard’s efforts to improve the central bank’s knowledge of macro-prudential policy.
The current governor increased the amount of capital banks must have on their balance sheet to offset riskier loans. In August, Wheeler also said that loans for more than 80 percent of a property’s value must account for no more than 10 percent of a bank’s new lending, down from about 30 percent. The limit was more aggressive than the 15 percent anticipated by banks.
“He probably has a greater confidence in enacting some of these policies because of his background than others would have had,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “He has probably moved quicker than any of the alternatives we could have thought of for governor, including his predecessor.”
Bollard, who led the central bank for 10 years from 2002 to 2012, didn’t have prudential tools when annual house price inflation surged to more than 15 percent in early 2006. He raised rates to a record 8.25 percent and held them there until July 2008. The elevated borrowing costs drove the currency higher and tipped New Zealand into a recession that was exacerbated by a drought and the global financial crisis.
With the sole decision-making responsibility at the RBNZ, Wheeler has held the official cash rate at a record-low 2.5 percent since he took over the role, prolonging a period of low borrowing costs that began in March 2011.
Elsewhere in the world, Taiwan will probably keep its benchmark interest rate unchanged for a ninth quarterly meeting today, according to economists surveyed by Bloomberg News. Data from the U.K. may reiterate the economy grew 0.7 percent in the second quarter, a Bloomberg survey showed.
Wheeler’s reluctance to raise interest rates has helped cap demand for the New Zealand dollar, which has retreated after climbing to a 20-month high of 86.76 U.S. cents in April. The decline also reflected speculation since mid-year that the Federal Reserve will start to cool the stimulus that has suppressed the U.S. dollar. The currency bought 82.41 U.S. cents at 12:05 p.m. in Wellington.
“The RBNZ has moved reasonably quickly on issues like formalizing the macro-prudential framework,” Finance Minister Bill English said in an interview last week. Wheeler has brought “a deep understanding of the global economy to the job and that’s helpful for a small open economy that’s affected in lots of different ways by decisions everyone else makes that we can’t influence.”
The governor helped the decline along when he told members of a parliament select committee on May 8 that the central bank had been intervening to sell the New Zealand dollar.
Wheeler worked at the World Bank from 1997 to 2010, joining after a career at New Zealand’s Treasury department that culminated in his leadership of the Debt Management Unit. He was appointed treasurer of the World Bank in 2001 and became one of two managing directors in 2006. He played a pivotal role in the institution’s response to the global financial crisis, then World Bank President Robert Zoellick said when Wheeler stepped down in 2010.
“What I saw in the States did influence the way I did think to some extent about this issue,” Wheeler said Sept. 12. House prices “are significantly overvalued” in New Zealand and a rapid correction in prices would have very significant effects for financial stability and employment, he said.
Wheeler established a committee of four governors, including Deputy Governor Geoff Bascand, a former Treasury department colleague he hired in May to be responsible for the central bank’s operations. The committee will discuss all major monetary and financial policy decisions, though Wheeler said he retains a right of veto.
Under New Zealand’s model, the governor is the sole decision maker. Opposition politicians say Wheeler’s refusal to cut interest rates this year boosted the currency and damaged the economy, with the Green Party proposing a representative board to make the rate decision.
If a change was forced on him, Wheeler “is a pragmatist,” said BNZ’s Toplis. “He’d make work whatever he was dealt. Given his nature, I’m absolutely sure he listens well to all the information he’s getting.”
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