English not concerned banks failed to pass on OCR cut

See also: Government needs to hold to its line on dairy

Finance Minister Bill English told says he's “not overly concerned” that many of the big banks haven’t passed on all of last week’s official cash rate cut to customers.

The four largest banks, ANZ, Westpac, BNZ and ASB, did not pass on Thursday's surprise 0.25 cut in full.

“Well, I understand some have, some of the smaller banks, so we’ve, I think, yet to see how the competitive pressures will roll out following on from the cut in rates," Mr English says.

“I’m not overly concerned in the sense that there’s some way to go. They may not have passed it on immediately. They’ve got some argument that because of this global volatility we’ve all been talking about, that raising money offshore is a bit more expensive than it used to be.”

Bill English told Q+A “in the long run it’s the competition that has the most impact on the banks.”

Mr English ruled out a bailout or some form of extra assistance for farmers.

“Yes, we do rule that out. The government has in place a system for dealing with hardship, because you are going to see, for a small number of dairy-farming families, some real distress. But we’re certainly not going to be bailing them out," he said.

Mr English also told the programme, “The thing that matters about the housing market this year is that Auckland Unitary Plan, and it needs to indicate to all buyers and sellers that there will be sufficient supply coming into Auckland, that prices won’t keep rising forever.”

RAW DATA: Q+A transcript: Finance Minister Bill English interviewed by Corin Dann

Watch the show here

CORIN Minister English, if we could start straight away this morning with the Official Cash Rate review from Thursday. The banks have not passed that 25-basis points cut on in full. How concerned are you about that?

BILL Well, I understand some have, some of the smaller banks, so we’ve, I think, yet to see how the competitive pressures will roll out following on from the cut in rates.

CORIN The largest bank in New Zealand, ANZ, has not passed it on in full. Neither has Westpac. How concerned are you?

BILL I’m not overly concerned in the sense that there’s some way to go. They may not have passed it on immediately. They’ve got some argument that because of this global volatility we’ve all been talking about, that raising money offshore is a bit more expensive than it used to be.

CORIN But you accept that argument.

BILL I think it’s certainly real, but I also think the competitive pressures will bear in on them eventually.

CORIN But they’re making $4.5 billion in profits in the last year from what I can see – the big four banks. Surely they can afford to pass on a 25-point basis cut.

BILL Well, I’m sure every mortgage holder thinks that. We’ll just see how the competition--

CORIN But do you?

BILL Well, we’ll just see how the competition sorts it out. In the long run, we need profitable, stable banks. This country’s benefited from that over the last seven or eight years when a lot of countries have had the opposite problem, and that is banks that weren’t profitable. So it’s up to the banks to make those decisions and competition’s the best way to sort it out.

CORIN What’s the point in having an Official Cash Rate if it’s not being passed on at a time when the Reserve Bank is very worried about low inflation turning into a self-fulfilling prophecy? And yet it’s not getting the bang for buck.

BILL You’d need to talk to the banks about exactly where the Official Cash Rate fits in their systems. It’s just it’s not the only influence on the cost of mortgages. There’s been times when mortgages have dropped without a drop in the cash rate because overseas funding costs dropped. It’s really a matter for the banks, and if some of them have passed it on, that’s going to put pressure on the rest of them.

CORIN Okay. Can you give mortgage holders an assurance that if over the course of the year and we see more cuts from the Reserve Bank, which is highly likely, and the banks aren’t passing that on, will you talk to the banks? Will you pressure them? Can you give them an assurance you will do everything you can to make sure they do?

BILL I wouldn’t give them an assurance that it’s certainly going to be passed on because that’s not our business. But we’re always talking to the banks about how they’re dealing with the public, how they’re dealing with the dairy sector, and we would express a view that mortgage holders would expect it to be passed on. In the end, they have to keep their customers, and I think in the long run it’s the competition that has the most impact on the banks. It’s what other banks are doing that matters.

CORIN But here’s the thing. The Reserve Bank Governor in an interview in the Herald yesterday seemed to suggest that if the dairy sector debt blows up and you’re looking at $5 billion or $6 billion in losses for those banks -- worst case scenario, granted – they’ll start crimping that back through higher interest rate charges to you and I and every homeowner.

BILL Well, we’ve yet to see how all that is going to unfold. I wouldn’t want to prejudge it now. But if the argument is whether or not we should have banks that are profitable, well, they need to be profitable because when they aren’t, things are much worse, as we’ve seen in other countries.

CORIN Is it acceptable for the big banks to claw back losses from the dairy sector by charging higher mortgage rates for Kiwis?

BILL We’re all speculating here.

CORIN Do you have a problem with them doing that should they need to?

BILL They’ve got to run a business, and they’ll run it in a way which has to be acceptable to their customers. The dairy farmers have been making losses for the last 12 months, and we’re still seeing reductions in interest rates, and home mortgage rates are as low as they’ve been for 50 years. So whatever it is people are saying they might do, they may be already doing it for all we know.

CORIN The reason why I bring this up is because Andrew Little’s saying the government should be holding a crisis meeting with the banks and Fonterra and that if he was Prime Minister, he’d be stiff-arming the banks into line. Are you doing enough?

BILL There’ll be plenty of meetings going on. You’ve got the banks, Fonterra, Dairy NZ, Federated Farmers – a while lot of people who have a vital interest in managing their way successfully through this theory in time of pressure.

CORIN But what about the government and leadership? Where are you in this?

BILL We take the role, as we always have done, of setting a framework here. So, stable macroeconomic framework which is leading to the lowest interest rates dairy farmers have had for a long long time; ongoing programme with the Resource Management Act changes, for instance. I mean, if the Opposition want to support the dairy industry, they should vote for the TPP and the changes in the RMA. That’d mean more than some talkfest.

CORIN The TPP is not going to help them over the next 18 months, is it?

BILL No, but it would indicate support. It would indicate politicians taking some action which is going to underpin our long-run confidence in the industry.

CORIN Will you rule out some form of bailout, some form of extra assistance to farmers, should they need it over the next 18 months?

BILL Yes, we do rule that out. The government has in place a system for dealing with hardship, because you are going to see, for a small number of dairy-farming families, some real distress. But we’re certainly not going to be bailing them out.

CORIN What about this worst-case scenario that the Reserve Bank has been looking at where we have three years of payouts down at $4? What about if we get into that scenario where we have large numbers of dairy farmers defaulting? And he talked about 10%-15% of the $40 billion in debt could be lost by the banks. What’s that? $5 billion or $6 billion. What if it is a threat to the country’s financial stability? Would you underwrite those loans? Would you step in?

BILL It’s hard to imagine it would be a threat to the stability of the country. I mean, back in 2008, the government put in place a guarantee when it looked like the whole banking system was at risk, and that’s hundreds of billions of dollars. So a few billion of losses for the banks is not a threat to financial stability. The regime that’s in place now means the banks are stronger than they’ve ever been. They have greater ability to withstand those losses than they’ve ever had. And the dairy industry’s had a pretty good run, and a lot of their balance sheets are in reasonable shape. So, yes, there may be some losses, but I doubt they’d be a threat to the financial stability.

CORIN But doesn’t the dairy woes expose the fact that the housing market is still a big worry? It suddenly makes the worries about the housing market a lot worse because you’re exposed now.

BILL It does, I think, help people understand the risks of a housing market where values keep rising too fast, particularly in Auckland. The difference between the two is that with the housing market, New Zealand has a fair bit of control, or longer-run influence, over what happens with it through the way that we regulate supply in our planning system. And that is why some of the decisions that’ll be made this year by the Auckland Council are really important, because if they make good decisions, we’ll get more—

CORIN But nothing you can do for supply will address the short-term issues. The Reserve Bank governor was practically saying he hoped that the Auckland market didn’t take off again. Hoped. I mean, that wasn’t a great vote of confidence that it’s not going to suddenly—these cuts in interest rates won’t eventually pour fuel on the fire.

BILL And that’s a dilemma he’s had to deal with. That is a lot of pressure on him about cutting rates, but also concern about the housing market. The thing that matters about the housing market this year is that Auckland Unitary Plan, and it needs to indicate to all buyers and sellers that there will be sufficient supply coming into Auckland, that prices won’t keep rising forever.

CORIN What about in the Budget? Are you looking, though, at any other demand-side measures? Last year the Prime Minister talked about a stamp duty as a possibility for non-resident buyers. Is that something you could consider I if you saw those Chinese buyers, for example, or any buyers from anywhere in the world, coming back in?

BILL We’re not considering further demand-side measures. I think that would be a bit of a distraction. We’re waiting to see what the last round did – the Reserve Bank restrictions, the change in the tax on high-turnover houses. The focus this year is on getting that Auckland Unitary Plan right because that’s going to give an indication to the market looking out five, 10 years.

CORIN Have you had initial figures, though, back from the withholding tax data, the IRD data that you’ve demanded of non-resident buyers? Have you got a grasp now on the problem? Can you give us an idea of what that’s telling you?

BILL We still don’t quite have enough months of data, but given the level of interest in it, you can be sure—

CORIN What’s the initial trend you’re seeing?

BILL I couldn’t comment on it, to be honest. Just haven’t seen enough of the information, but it will certainly be available to the public when it’s available to us.

CORIN One of the criticisms, Mr English, of your management of the economy is that if you stripped out migration, the economy is not growing. Is that correct?

BILL No, that’s not quite correct, but strong migration is a good problem to have. The opposite means a shrinking economy.

CORIN I spoke to Shamubeel Eaqub last week, and there have been other economists who say, in fact, per capita growth – take out the migration that we’re getting at the moment, and it is pretty much zero, isn’t it?

BILL No, there’s actually still slightly positive per capita growth, but it’s what you would expect when you have a big influx. This migration inflow – the extent of it’s been surprising, and the length of time it’s gone on has been surprising. So the economy is absorbing a lot more people. That’s the time you would expect per capita growth to be a bit lower, and as migration slows, per capita growth’s likely to pick up.

CORIN But your point is you’ve become immensely dependent on that migration in order to drive growth. You talk about a little bit of positive growth. How much?

BILL No, we haven’t become dependent on it. I mean, this is a silly argument that various critics run, particularly the Opposition. They keep running this line that if you take out the things that are growing, then there’s no growth. So a couple of years ago, it was all dairy. Now they’re saying it’s all migration. Before that, it was all Christchurch. The fact is, this economy, as the Reserve Bank forecast last week, looks like it’s going to grow 2.5%-3% through the next three years because lots of different things are happening. I’ll just give you an example. Dairy exports are down by $3 billion in the last 12 months, but total exports are up by almost $2 billion. So there’s been $5 billion of growth in other exports at a time when dairy has shrunk by three. That is a diversifying economy.

CORIN But that’s largely tourism, though, isn’t it? And we know tourism is a particularly fickle industry.

BILL Well, there you go again. We’re not growing except for immigration, except for tourism and except for construction. You know, this is growth, Corin. We’ve got good, strong immigration; we’ve got strong tourism growth; the construction industry continues to pick up. And we’ve got a lot of export sectors like IT and wine who are growing quite fast. So we’ve got a broad base of growth aside from dairy.

CORIN So broad-based growth, granted. 3% growth is what some are predicting. Are the people watching this morning going to get 3% pay rises this year?

BILL About half of them got 2%-3% last year. We would expect something similar this year at a time when inflation is less than 1%. So we’re one of the few developed countries with real wage increases. By contrast, the former secretary of the Australian Treasury told us last week real incomes in Australia have been flat to falling for the last four years. So we’re doing okay.

CORIN Just a quick one to finish, Mr English, the outlook for the global economy, America, financial stability. Are you worried at all that if we see a Donald Trump presidency, it might throw a big spanner in the works of the global economy?

BILL I don’t think a particular person in the presidency has that much impact, but certainly there are some concerns with the global economy. The concern seems to fluctuate; some weeks everyone’s forecasting Armageddon, and other weeks they seem to have forgotten about it. But by and large, it’s running a bit slower, but we’re running at 2.5%-3%, and that looks pretty consistent.

CORIN Finance Minister, Bill English, thank you very much for your time this morning on Q+A.

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