Nick Mowbray: Let’s ease up on the easing before pain exceeds gain


I could not be prouder of the way New Zealand responded to Covid-19. Our Government’s difficult decisions have been vindicated; our elimination policy has been a success.

Of course every death is devastating and to lose 25 people is a tragedy. But as citizens, the positive disposition for which we’re world famous has manifested itself in strength and resilience when most needed. We must celebrate the countless lives saved by our collective actions.

New Zealand’s economic data speaks for itself. Unemployment is back to levels just above where it was a year ago. Gross Domestic Product (GDP) is where it would have been had the trend from a year ago simply continued without Covid-19. Take a bow, New Zealand.

Despite some abuse of the wage subsidy programme, for the most part business has done its part, too. The result is clear: New Zealand has exceeded expectations. It might not have felt that way when I wastyping this from lockdown this week,but in relative terms our performance has been a triumph.

To continue to be a world-beating nation, we need to lift interest rates and stop the quantitative easing (QE) programme.

We must stay progressive. Whereas employment and GDP have normalised, monetary policy has not. Interest rates remain suppressed and the Government continues to purchase about$500 million of government bonds each week. The longer this remains the case, the greater the risk to our long-term prosperity and social equality.

In March last year, the Reserve Bank (RBNZ)did two things. It slashed the official cash ratefrom 1per cent to 0.25per cent and providedcertainty – much needed at the time –by stating that rates would remain unchanged for 12 months.

Italsoannounceditwould buy up to $30 billion (since expanded to $60b) of government bonds. Such an occurrence would not have been in anyone’s wildest imagination just weeks earlier. But the world changed quickly and existing policies became outdated.

In the words often attributed to Sir Winston Churchill: “When the facts change, I change my mind. What do you do?” Well, the RBNZ showed itscapacity to change with the facts in March last year.

Fast forward to today and equally unexpected has been the speed of our V-shaped recovery. This means policy that was appropriate just months ago no longer is. Churchill’s words ring in my ear. The facts have changed, so once again the RBNZ policy should change. Interest rates should be increased so that risk becomes appropriately priced.

The bank’sopportunity to do so is next week, at their first meeting for 2021.

Unfortunately, they will almost certainly leave rates as they are.

I acknowledge their challenges. Inflation is exceeding market expectations but is below the 2per cent future level the RBNZ’s legal mandate requires itto target. Raising rates may also translate into a stronger NZ dollar,which would harm our exports.

However, keeping rates suppressed and the economy flush with cash exposes us to greater insidious risks. Given this, at the least, I hope the RBNZ gives guidance that rates may be increased once the 12-month period expires next month, and that QE is under review.

Fuelled by cheap debt, asset prices have increased far too quickly – at a cost to all and a benefit only to existing asset owners. This is most apparent in the dramatic increase in house prices in Auckland and around the country. That’sgreat if you are a homeowner, but not if you are not.

This is not fair. I welcome the recent announcements of pending policy to address this issue, but this is bigger than house prices alone. We don’t wish to jeopardise the social contract that has served New Zealand well.

The more important issue is the cost of debt and supply of money, and we need to address the issue at its core. The dynamic within the Auckland property market reflects a story occurring globally at the moment: cheap and available debt is pushing all asset prices higher and in the process increasing wealth inequality. Social mobility has become too hard.

In a world thatdivides society into asset owners and non-owners, getting ahead is increasingly dependent on the willingness to accept huge amounts of debt secured against assets that are the most expensive they’ve ever been. The risks are too great.

I am an advocate for taking calculated risks; I have built my career on taking big bets.

Along the way, we have sufferedfailure many times. But we took the biggest chances in an environment when risks and assets were more appropriately priced so our failures did not mean the end; we could get back on my feet each time.

My fear is that those buying expensive assets today with the aid of artificially-low interest rates may not be as lucky.

Many members of our amazing team at Zuru’s Auckland office are at the start of their working lives. Indeed, at age 35, I am one of the oldest people in our office. Every day I am blown away by their creativity, work ethic and entrepreneurial spirit, as well as their positive can-do attitude. Is it fair that they are living in a city where house prices are now 8.6 times the median income?

Sustaining low interest rates and the QE programme come at a huge cost to non-asset owners and our future generations. To my mind, that will end up being too high a price for all of us to pay.

– Nick Mowbray is an entrepreneur and co-founder of Zuru Group.

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