Wheeler Heeds U.S. Subprime Lessons to Spearhead Rate RisesMatthew Brockett
As a senior World Bank official in Washington from 1997 to 2010, Graeme Wheeler saw how the U.S. subprime mortgage crisis unleashed a global financial meltdown.
Since taking the helm of the Reserve Bank of New Zealand in September 2012, he has drawn on that experience, introducing lending restrictions last year to try to deflate an overheated housing market. Now he’s turning to conventional tools, becoming the first central banker in the developed world this year to start raising interest rates.
“One thing that does stop recoveries in small open economies is inflation getting out of control,” Wheeler said. “That’s the thing that we want to avoid. We want to move early, we want to contain inflation expectations, we want this recovery to go for as long as possible.”
The RBNZ governor, who is the sole decider on monetary policy in New Zealand, yesterday raised the official cash rate by a quarter percentage point to 2.75 percent, bringing an end to three years of record-low borrowing costs. Further increases are likely in coming months and the key rate may climb to 3.75 percent by the end of the year, he said.
That risks fueling demand for New Zealand’s dollar and damping growth as peers continue to hold their benchmark rates at historic lows. The so-called Kiwi jumped more than half a U.S. cent after yesterday’s rate decision and continued to climb throughout the day to reach a 10-month high above 85.5 cents.
“It’s true that we’re leading the tightening phase amongst the advanced economies,” Wheeler said. “The exchange rate pressures are a concern for us, but we also feel that we’ve telegraphed these moves quite carefully. I don’t think it’s a surprise.”
While all 15 economists surveyed by Bloomberg News had forecast yesterday’s increase, the central bank also raised its projections for the 90-day bank bill rate, a guide to the outlook for interest rates.
“They’ve got 200 basis points in the 90-day bills by the end of 2015,” said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research in Wellington. “That’s quite a strong and hawkish projection. The signal was very much that interest rates are going to rise, and rise for some time.”
Economists expect three further quarter-point increases this year, in April, June and December, according to the median of 15 forecasts in a Bloomberg survey.
The RBNZ now sees inflation reaching 2 percent, the midpoint of its 1 percent to 3 percent target range, by mid-2014, 18 months sooner than it predicted just three months ago. Annual average growth will accelerate to 3.5 percent this year, it said.
New Zealand’s economy sank into recession in 2008 and had only just started to recover in 2011 when an earthquake in the South Island city of Christchurch damaged thousands of buildings and killed 185 people. That prompted the RBNZ to immediately reverse a fledgling monetary tightening and cut its benchmark rate back to 2.5 percent.
Today, the Christchurch rebuild is fueling growth and fanning price pressures. At the same time, surging dairy sales to China are boosting export returns, immigration is the strongest in a decade, and house prices in Auckland, New Zealand’s biggest city, have jumped 17 percent in the past year.
After announcing plans to restrict low-deposit mortgage lending last year, Wheeler in September spoke of the devastation caused by the bursting of the U.S. housing bubble and how the experience influenced his thinking.
“His international experience, in my view, lends a lot to his authority and credibility,” Finance Minister Bill English said in an interview last month. “His international experience occurred through the most testing time in several generations for the world financial system.”
With a general election scheduled for Sept. 20, monetary policy is set to become a political football. Opposition parties are promising to force Wheeler to focus on more than just inflation if they can oust Prime Minister John Key’s government from office.
Labour leader David Cunliffe told state broadcaster TVNZ on March 9 that while he believed in an independent central bank, he’d make changes to the Reserve Bank Act that would lead to lower interest rates.
Wheeler said yesterday that adding goals such as employment to the central bank’s mandate wouldn’t result in lower borrowing costs. He also rejected suggestions by politicians at a parliamentary committee hearing that he was smothering the economic recovery before it had taken hold.
“Central banks are often cast as being the ones to take away the punchbowl when the party gets into its swing,” he said. “People shouldn’t forget that the Reserve Bank spiked the punch. To get this party going, to get the recovery underway, we reduced interest rates to the lowest level in 50 years.”