New RBNZ Governor says NZ has a 'very unusual tax situation and it reflects back into the banking sector' when asked about a Capital Gains Tax, sees no need for an NZ Royal Commission on banking

interest.co.nz April 22, 2018 - 12:11pm,

Jason Walls

Reserve Bank Governor Adrian Orr has outlined his position on whether or not New Zealand should have a capital gains tax (CGT), saying a more efficient, level playing field around tax is needed.

Speaking to TVNZ's Q&A on Sunday morning, Orr said New Zealand has a "very unusual tax situation and it reflects back into the banking sector."

"When you see 90% of household wealth being equity in a home and 80% of the loans in banks are to housing and you see relative prices of housing where they are, then you're saying 'hey this is a real issue.'"

He says this is something the Reserve Bank is mindful of, "around the concentration of risk and the potential unravelling if things happen."

"We [the Reserve Bank] have absolute legitimacy talking about what it is, why we see it as a concern, what we are doing about it with our toolset, but also putting sunlight on other areas."

The Tax Working Group will make a series of tax-related recommendations early next year including a potential CGT.

Asked if he will be submitting to the group, Orr said he will have to see what the group offers and the Reserve Bank will provide advice based on that.

His personal view on this issue is: "I think we need to have a more efficient, level playing field around tax."

Meanwhile, Orr says he is comfortable with the level of inflation.

On Thursday, consumer price index (CPI) data showed inflation was 1.1% in the year to the March quarter, almost at the bottom of the Reserve Bank's 1% to 3% range.

"The fact inflation is at 1.1% is great, that's low and stable."

He says the central bank is aiming for 2% and he is confident inflation is heading up to that level.

In its projections, the Reserve Bank sees the Official Cash Rate (OCR) moving up in mid to late 2019.

This means people with fixed mortgage rates that come off in two or three years will be hit with a larger interest bill.

Orr says this is a concern for people but, at the end of the day, borrowing comes down to people's personal positions.

"[For a borrower] it's really thinking about what is my certainty, what is my liquidity needs, what's the horizon over which I can manage this particular payment."

No NZ banking inquiry needed

Last week, the Australian Banking Royal Commission revealed a myriad of issues within the sector.

The review led to the resignation of AMP CEO Craig Meller, who apologised "unreservedly" after the company admitted to charging customers for advice they never received and repeatedly lying to the corporate regulator.

Orr says this is "not a happy situation" and the Reserve Bank is keeping an eye on the events as they unfold.

Many of the issues identified in the Commission's report came down to the culture of the Australian banking system.

He says the culture of the New Zealand banks is "infinitely better than some of the activity in Australia."

Does New Zealand need a similar inquiry into how its banks, the biggest all Australian owned, are operating?

Orr says no.

"I don't see any lack of confidence in banks in NZ, they are highly capitalised and highly efficient." [Now, where have I heard that before? –RJB]

He says there are institutions, such as the Financial Markets Authority which is "all day every day thinking harder about consumer and investor behaviour."

The central bank's regulatory responsibilities are due to be reviewed in the second phase of the Reserve Bank Act review.

The way the Reserve Bank regulates banks has come under fire. Ex-BNZ chairman Kerry McDonald recently said the Reserve Bank's approach to bank regulation is weak, ineffective and leaves banking customers seriously exposed.

Banking expert David Tripe and the New Zealand Initiative have also voiced concerns about the Reserve Bank.

Orr says he's taking these concerns seriously.

"As regulators, we have actively chosen not to do certain types of activities because they are already being done to the banks.

He says huge amounts of work in this area are already being done by the Australian Prudent Regulation Authority, as well as work by the FMA here in New Zealand.