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As you’ll all be aware, RBNZ Governor Adrian Orr has somewhat dramatically ended his tenure midterm. His eventful seven-year stint has seen more headlines and polarisation than any previous governor. Whilst his tenure was marked by controversy, he also faced unprecedented challenges, making a tough scorecard inevitable.

Nevertheless, the reign of Orr is over. Long live the new king!

With a new governor about to be elected, here are eight things we'd really like to be top of mind.

1. Reduce the capital requirement differential between home and Agri lending.

This one’s obvious. We’ve been pushing for this since founding NZAB over eight years ago. The RBNZ must reduce the RWA difference (risk-weighted assets, i.e. capital weightings) between Agri and home loans. This imbalance has restricted capital to productive sectors since 2015, funnelling billions into home loan growth instead. Agri loan losses are minimal, yet banks charge higher margins to justify extra capital weighting resulting in money being drained from provincial NZ, stifling productivity and export earnings.

Part of this is holding banks to account on the additional margins they are charging farmers over and above this risk premia (the RBNZ has been on record to say the additional capital that Banks need to hold for Agri would explains a 0.60% margin differential- but banks are running at 1.25%+ above on average) . The best way to do that is to foster more competition. See point 3.

2. Roll back proposed capital increases for all types of lending.

This differs from the above. The RBNZ wants all lending, across sectors, to hold higher capital buffers than required internationally, targeting a 1-in-200-year risk event instead of the standard 1-in-100-year tolerance. But remember, NZ banks weathered the GFC with far lower capital and core funding ratios than today, plus they have comfortably weathered (with little or no losses) an unprecedented global pandemic that shut businesses across NZ.  Go figure. 

3. Encourage new lending entrants into Agri by lowering capital ratios for new banks.

Would it surprise you that any new deposit taking institution that wants to start lending to Agri faces materially higher capital requirements than the majors? This discourages competition and diversification, contradicting the RBNZ’s financial stability mandate. More lending players reduce ‘too-big-to-fail’ risk.

On the bright side, we see strong interest in new Agri lending outside the main banks. NZAB has completed many transactions in this space, already securing alternative lending capital pools for Agri, with new options hitting the market soon.

4. Fund Stats NZ to ensure monthly (not quarterly) CPI updates.

It’s absurd that NZ lacks monthly full CPI updates. We get a selected price index monthly, but full CPI remains quarterly, leaving an at times four-month lag before new inflation data. This lag was a handbrake on GDP last year—the RBNZ waited too long to see inflation die before adjusting rates, prolonging recession. This is an easy fix with some more labour or technology into Stats NZ.  This needs to be done yesterday.

5. Focus more on forward-looking indicators, not just lagging data.

Monetary policy is like steering a Titanic — slow to turn. So why base OCR decisions solely on lagging CPI data? We should incorporate leading indicators into our future economic models and in turn, our OCR settings, like:

• PPI (Producer Price Index) – Future input costs
• CCI (Consumer Confidence Index) – Future spending trends
• Employment Intentions – Hiring/firing outlook
• Private Sector Credit Growth & M3 Money Supply – Money flow trends

With AI-driven analytics assisting with forecasting, this should be straightforward.

6. Hold monthly OCR meetings.

Right now, the OCR is reviewed only seven times a year, which is not enough in today’s fast-moving economy. The RBNZ should meet monthly and tie updates to real-time data improvements.

7. Consider making ’economic growth’ a dual RBNZ mandate.

I’m mixed on this; previous dual mandates (like ’maximum employment’) didn’t work well. But if RBNZ had to consider growth, we’d see the OCR settings supporting growth in the economy more. This is likely to keep inflation at the upper end of the target band rather than the middle to lower, but if there are ever any coin toss type decisions, then the decision should be to go for growth rather than restriction.

Beyond policy, the RBNZ should be a pro-growth voice, signalling to both Government and domestic and global investors that NZ welcomes investment. Imagine an RBNZ Governor actively promoting growth — this alone would drive capital into NZ businesses.

8. Address floating mortgage pricing in the home loan sector.

This isn’t really an Agri specific issue, but more an opportunity to correct a fundamental driver of the speed of economic change.

In Australia, 80% of home loans are floating. In NZ? Just 10%. Why? NZ banks don’t compete on floating rates, making them uneconomical vs. fixed. Banks prefer fixed because it locks in customers, but this delays monetary policy’s impact.

When the OCR changes, it takes 6 -12 months to filter through the NZ economy versus near-instant effects in Australia. In a rising market, this would also mean that rates wouldn’t need to go so high, the changed rates would have an immediate cooling affect.  Instead we wait for loans to roll, creating an even bigger issue that needs fixing with even higher rates.

If RBNZ shone a light on this lack of competition with floating rates, we could improve interest rate responsiveness, avoiding over-correction.

These are real changes that NZ’s financial system needs.

Let’s hope the next Governor takes them seriously.

I’m sure there will be different views on all of these topics and like always, we’re keen to hear them, so please feel free to drop us a note back.

 Who is NZAB?