Sir John Key told attendees at a Deloitte-hosted event in Auckland this week that present inflation levels don't justify the Reserve Bank's official cash rate. Photo / NZME
Former Prime Minister Sir John Key says interest rates are too high and should be cut by 100 basis points to boost business confidence and help the economy bounce back.
Speaking at a Deloitte-hosted event in Auckland this week attended by start-up founders, venture capitalists and Mayor Wayne Brown, Key was also critical of former Reserve Bank Governor Adrian Orr and the foreign buyer property ban.
“Interest rates are too high. I don’t want to sound like Donald Trump telling off Jerome Powell but they should be 100 basis points lower,” Key said.
“You could argue there’s inflation,” he continued.
“But, seriously, there might be a little bit of food inflation, but it’s very little. Fuel inflation isn’t much. And there’s certainly no wage inflation. And even if there was, I’d trade a bit of inflation to get the place going.”
While GDP grew at 0.8% in the first quarter of this year, there are fears some economists fear the second quarter could be negative.
The manufacturing and services sectors both remain weak and on top of that, the property market is subdued.
Key maintained that Orr, who resigned as Reserve Bank Governor in June, mismanaged monetary policy over several years.
“Adrian fixated on getting interest rates to zero,” during the pandemic, Key said.
“Then he fixated on having them too high for too long.
“A lot of the indicators the Reserve Bank looks at are lagging indicators. They’re quite late to the party,” Key said.
The Reserve Bank held the Official Cash Rate (OCR) at 3.25% on July 9 but hinted heavily in commentary it expects to resume rate cuts later in the year.
Acting Reserve Bank Governor Christian Hawkesby won’t give an in-person briefing until the August 20 rates review.
Financial markets are currently pricing in a 70% chance the OCR will be cut by 25 basis points in August, with a 50% chance of another cut by February 2026.
Economists expect the OCR to bottom out at around 2.5% to 3%.
Immigration Minister Erica Sanford recently said there had been more than 200 applicants to the “golden visas” introduced in March, with 100 approved in principle so far and more than $1 billion on the table for investments.
Applicants have to pledge at least $5 million for “growth” investments such as start-ups or $10m for “balanced” investments.
Key said 10,000 investor immigrants would be better, but many were put off by the foreign buyer ban in housing.
“If I’m turning up with $100m, are you telling me the best I can do is rent a house?” Key said.
“We’re a little country at the bottom of the world. And to make that work, you need foreign capital. You need smart foreigners to come here. You need positive population growth, migration,” Key said.
The former PM did not see the foreign buyer ban, championed by NZ First, as keeping house prices down, at least in everyday suburbs.
“If I’m a billionaire in China, I’m not going to wake up and think I want to buy a $800,000 house in Pakuranga,” he said.
“They might buy a $50m property on the lakefront in Queenstown.”
Key said agriculture was booming, but New Zealand was stuck in an “L-shaped recovery, not a V-shaped recovery like after the GFC”.
Key saw a turnaround in house prices, fuelled by lower rates, as the key to restoring confidence.
“If you want to get things going, the core of what’s wrong is the housing market. The guts of what’s wrong is that the housing market is going down, not up,” Key said.
“When house prices go up, everybody tells the pollsters, ‘Oh that’s terrible, my son or daughter can’t buy house. I feel really bad. The technical term for that is ‘bulls***’,” Key said.
“What they really do, is they say to their wife – or the wife says to her husband, ‘God, we paid $1m for this house and it’s worth $1.7m now.’ Quietly they go, ‘Oh, we feel rich. And then they go and borrow a bit from the ANZ and they go on holiday and they upgrade their kitchen, they feel good about life. So when you have a negative wealth effect, they feel bad.”
The median house price in Auckland has fallen 3.4% in a year to $990,000, according to figures released earlier this year by the Real Estate Institute. Excluding Auckland, the median price rose 1.7%.
As he called for lower rates, Key acknowledged he had skin in the game.
“My son’s a developer, so I’m talking a bit from personal experience,” Key said.
“I’m just telling you, we have got so much stuff on hold. We own land all over the show, and we’re just sitting there not doing anything.
“He [Max Key] goes, ‘Mate, my tradies’ – he’s got a bunch of these guys on the payroll in different places – ‘none of them had Christmas holidays. There’s no work’.”
Many tradies were working three-day weeks, Key said.
And for the party in power, that was a problem.
“To win an election, you have to win where the tradies live,” Key said. And that meant winning West Auckland.
“Don’t worry about Remuera, don’t worry about anywhere else,” Key said, tracing similar ground to political commentator Chris Trotter, who once described that archetypal middle New Zealand swing voter as “Waitākere Man”, a blue-collar conservative.
“Don’t worry about Remuera, you’ve got to win Te Atatū, you have to win West Harbour, you have to win Waitākere.”
Is the former PM passing on his thoughts to his successor?
“I’m pretty close to Chris, and I talk to him quite a lot. But I don’t try to be his father. I don’t try to tell him what to do,” Key said.
Although he had concerns about the current state of the economy, he saw Christopher Luxon’s Government ultimately prevailing as things picked up.
Key related that he said to Luxon: “You bet your house against my house: is the economy going to be stronger or weaker by the time of the election in 2026? We couldn’t bet because we both thought stronger.”
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.