Adrian Orr: Kia orana tatou katoa. Tēnā koutou katoa. Welcome to Te Pūtea Matua, the Reserve Bank of New Zealand and wonderful to see you all here. In particular, very pleased to be supported on stage here with Karen Silk, Assistant Governor and Paul Conway, our Chief Economist. And would also like to note across the front here we have the full monetary policy committee team here in person today, which is great. Thank you for all of your support, Caroline, Peter, Bob, and Christian as well. So thank you very much. So we're here to talk about our monetary policy statement and as you can see, the committee decided today to increase the official cash rate from 3.5% to 4.25%. So a 75 basis point increase. The committee agreed that the OCR needs to reach a higher level and sooner than previously indicated to ensure that inflation returns to within its target range over the medium term.
Core consumer price inflation remains too high. Employment is beyond its maximum sustainable level and near term inflation expectations have risen. So this is quite a heightened inflation environment. Internationally, global consumer price inflation is broad based and also remains heightened. Food and energy prices and consistent core inflation have combined to create a very high headline inflation in many of our trading partners. Central banks are tightening monetary conditions as are we in an effort to slow spending and reduce this inflation pressure. The ongoing slowdown anticipated in global growth will affect New Zealand's economic activity through financial and trade channels and also impacting on people's confidence given the global uncertainty.
In New Zealand to date, household spending has remained very resilient, especially considering the rise in debt servicing costs, the fall in house prices and the low levels of recorded consumer confidence. Supporting this robust spending, employment levels are high and income growth and household savings have been further supporting spending capability. The rebound in tourism is also supporting domestic demand.
However, the productive capacity of the economy is being constrained, in particular by broad based labour shortages and wage pressures are evident in the economy. Aggregate demand continues to outstrips New Zealand's capacity to supply goods and services. There are a range of indicators highlighting that this is contributing to a broad base of inflation pressures. So subsequently, the committee members agreed that monetary conditions need to tighten further so as to be confident that we have sufficient restraint on spending to bring inflation back to that one and 3% target range. I want to assure you the committee remains resolute in achieving our monetary policy remit. Thank you for listening and the floor is open for questions.
Media: Katie Bradford from One News, a couple of questions from me. First, you've got quite strong warnings expectations in there about a recession and how it will look different to previous recessions. Can you talk us through that? When can we expect that? What will it mean for people, et cetera?
Adrian Orr: Yes, thank you, Katie. What we're highlighting here is that inflation is no one's friend and in order to rid the country of inflation, we need to reduce spending levels. That means that we will have a period of negative GDP growth, we think to the tune of around 1% of GDP. So in that sense, it's a shallow period and at the moment we're saying that's around the second half of next year. I will say that the timing is always extremely difficult, on timing of quarterly growth rates. So our best estimate at the moment is spending to reduce sufficiently where we have a negative growth rate for a couple of quarters. It's important to put that in perspective. The level of economic activity remains high. The growth rates will be going backward for a small period.
Media: And on that wage growth. Do you think that wage growth needs to slow down and do Kiwis need to stop spending so much on that side of those drivers of inflation?
Adrian Orr: You've nailed it on the head. I think that the sooner inflation expectations, the sooner wage expectations decline back to being consistent with our target, then the less work there is for monetary policy to have to do. Otherwise it has to come through a drag on spending, which we are imposing through higher interest rates and the longer that takes to feed through to inflation the more costly it is. So it's all about expectations.
Media: Are people not getting that message? Are they not listening to you?
Adrian Orr: People... Spending remains strong and firms are sitting there with a wall of demand in front of them. Their challenge is they can't meet that demand in the absence of chasing labour and input goods and services. So spending has to come back down, the growth rates of spending. So yep, it's a loud message that in the absence of expectations, it comes through the real side of the economy.
Media: Tom Paul Striker from Stuff. When you delivered the last monetary policy statement here in August, inflation was roughly where it is today or very close to where it is today. Same with unemployment. Those numbers have barely budged yet we've seen a completely different response from the bank today with a forecast for the OCR being about one and a half percent higher than it was forecasting in August. Why the lurch when the underlying numbers there haven't changed?
Adrian Orr: Yeah, great question. I'm going to pass over to Paul to talk about the surprise. I suppose the near term surprises to inflation and inflation expectations and spending behaviour.
Paul Conway: So essentially we've seen inflation and inflation expectations persist for much longer than we were anticipating back in August and that has been driven by things like resilient household spending. It's been driven by a tourism recovery that's been faster than we were anticipating back in August. It's also global growth is moderately weaker but not sort of beyond what we were expecting back in August. So essentially we've got more strength in our economy and inflation is hanging in there a bit higher. Inflation expectations are hanging in there a bit higher than anticipated hints, the higher rate track. And sort of the longer inflation persists and the longer it sort of drags up inflation expectations, the more we have to work to get that back down in its box.
Adrian Orr: Yeah, probably one of the biggest near term differences and challenges to the committee is just the next couple of quarters on actual CPI inflation. We've been very reluctant to call a peak of inflation and it's just going to hang around these levels. So one quarter of a 7% inflation is quite different to a few quarters in the row of it hanging up there.
Media: Governor, Ben McKay here from Australian Associated Press. You don't have a monetary policy committee meeting for three months, I think now. Did you consider, how did that influence decision making at this meeting and did you consider a summer gathering given the unprecedented and worrying conditions?
Adrian Orr: So we've got a regular timeline that we put out. The conversations we had at the committee weren't about how we dish up the meal. It was about what is the meal and how soon does it have to be served? And the decision was that the meal was higher than otherwise expected interest rates and to get there sooner than we had anticipated. So we're comfortable within the timelines that we've imposed to achieve that. It's not like we don't stop watching the economy and wake up again in three months time. We will keep a live eye on how things are evolving.
Media: Can I also ask, just because I work across the road on your reappointment. Did you consider the ramifications of taking another term as governor given the various and growing political opposition to that?
Adrian Orr: I really didn't understand the question. Sorry. You were working where?
Media: At parliament. Okay. The question is did you consider your future in taking another term as governor, given the growing opposition to that happening?
Adrian Orr: The decision is made from advice from the board who were in full support and the minister accepted their advice and this institution is not a political institution. Our terms are five year terms deliberately to go through political cycles.
Media: Giles Beck was from Radio New Zealand. Two points. First of all, you have some discussion there about 75 and a hundred basis points, just how close was the decision on one percentage point rise and secondly about lag. I note the comment made by Jerome Powell recently about having to rethink their assumptions about the lagged effect of monetary policy and its impact. I just wonder whether you were rethinking your assumptions as well.
Adrian Orr: So I'll come to the lags, Karen. we can chat about what we're seeing and how it's feeding through. And Paul, we'll just go straight there actually just the lags between the OCR and -
Karen Silk: I'll just talk a little bit about the monetary conditions. So we don't believe there is contractionary as we had previously anticipated and there's a couple of things that we'd call out there. First of all, higher actual inflation is feeding through into higher inflation expectations as the governor's already pointed out. As a consequence, in the shorter run, interest rates that are deemed to be neutral from a monetary perspective actually need to be are higher. And that means actual interest rates need to increase further in order to do the work that we need them to do. But in addition to this, while we've seen an increase in wholesale rates since the August NPS, that hasn't flowed through on a one for one basis through two retail rates and banks are well funded and what is essentially a lower credit growth environment. They're carrying higher levels of deposits. So deposits are making up roughly 70% now of bank debt funding. And the mix of those deposits importantly are more heavily weighted to lower earning transactional deposits. And so what we aren't seeing is the same level of pass through to mortgage rates as well. And when we think about it from a transmission perspective, that's the important fact that needs to be taken into account.
Adrian Orr: And on the 50 75, 100, I think it would be fair to say the committee spent more time on 75 versus a hundred than they did with 50 versus 75. And as we note in our document there, I mean the decision was in consensus on 75, cognizant of how much we've already put in the pipeline.
Media: Eric Berg from Good Returns. Just about fiscal policy. There's a line here that says, "Members viewed the risks to inflation pressure from fiscal policies as skewed to the upside given the ongoing real demand for services." So skewed to the upside means what?
Adrian Orr: That it's kind of tipped to the upside.
Media: But I'm not quite sure what that means. How-
Adrian Orr: It means that it's likely to lead to higher inflation rather than lower inflation pressures over the period that we're interested in. So just a quick step back. We accept the fiscal position as per budget statements [inaudible 00:12:46] . In fact it was a [inaudible 00:12:47] wasn't it? Getting my [inaudible 00:12:50]. We accept the forecast budget, we put it into our own macro environment and then we also talk about the balance of risks. It is very clear that the demand for government services remains high and will remain high. That is a global phenomenon at the moment. The cost of providing those services rises with inflation as it does for everyone else. So to maintain the same real level of services, there is upward pressure on government spending without doubt. On the balance, that gives us comfort on that side is that a higher nominal GDP economy also means higher tax returns. So we have to think of both sides of the balance sheet when we think about the impulse of government spending on actual inflation. So we're saying there's a central view and there's the risks are more balanced to the upside of them having to spend more, not less than projected,
Media: But meaning that them spending more because of the social need means there's more emphasis upwards to government spending generally.
Adrian Orr: Just more government spending? Just more government spending generally. Yeah. Yes. More government spending the risk.
Media: Okay. Could one infer from this then that the, I guess level of social problems in New Zealand means that you've got to have slightly higher government spending than would be ideal and therefore you have to have a little bit more inflation?
Adrian Orr: That's not what we infer. We're just simply saying, here is a government budget balance. Since that's been put out, we've had more inflation to achieve that same level of services. It's likely to cost more, hence the upside. On the other side of it, there's likely to be more revenue. It's the net difference that matters for us. It's no social comment.
Media: Luke Mel from Stuff, governor, this is the... Not sure which number statement, were you've said that we're beyond maximum sustainable employment at the moment. Is the bank putting a number on that? How are you assessing that? What would you like to see the employment rate get back to that you would think was more sustainable in the current circumstance?
Adrian Orr: I'll talk about the extreme level we're at and let Paul warm up around the long and complicated story. There is no single number, which we talk about at length in the document for those who want to read the document. And at the moment we are hitting record levels of employment engagement, participation, record levels of actual employment, record survey levels of labour being the constraint on productive capacity. So in every place it's labour, labour, labour is the scarcity in the economy. So that there suggests and people, the churn on the labour mark is incredibly high. People in the same jobs are getting paid more or less the same, but people are changing employers or jobs to get higher wages. So there's a huge competition in the market that can add to inflationary pressures if it's not matched by productivity gains with it. So the level of employment is putting upward pressure on inflation at the moment. It would be inconsistent with low and stable inflation.
Paul Conway: Yeah, I mean I think the governor's answered the question. There is no one number that summarises maximum sustainable employment. The labour market is a a very nebulous sort of concept. [inaudible 00:16:21], we don't target it, we support it is what's in our mandate there as opposed to inflation, which is a single number that we can target. So we look at a broad range of indicators of where the labour market's at to get a sense of where it sits relative to this concept of maximum sustainable employment. And as the governor said, it's pretty clear across all of those indicators that the labour market is beyond maximum sustainable employment currently.
Adrian Orr: There's a wonderful table there in the document that highlights a dozen or so indicators and you'll see all of them are at or near record levels of stretch.
Media: Just going back to Eric's question, I just want to really clarify it around the government spending. Do you think that the spending or is government spending at the moment inflationary or too inflation and where is the balance at the moment do you think between the domestic and global drivers of inflation?
Adrian Orr: I'll answer the latter first. On the domestic and global, it's about half-half in that sense. Food and energy prices, the imported costs are contributing to about half to total inflation at the moment in New Zealand. And then half of it is coming from our own domestic homegrown pricing pressures with firms raising prices for whatever their services or products are. So an even balance. That's quite important when you're looking internationally, the highest inflation countries in the world are very impacted by the food and energy. We're middle of the pack for that one but we've got too much home grown inflation to add to it on the way. The other part of the question, if you can recall.
Media: What it was around government spending. Is that government spending inflationary to inflation?
Adrian Orr: The fiscal impulse has been-
Paul Conway: Well, the government calculates that so we don't, but I think there's a graph in the document showing that it has been pretty flat as far as government consumption goes, which is what we feed into our macro model. So it hasn't changed a great deal since the August prediction.
Adrian Orr: But we will just say all the things, all other things unchanged, which they never are... Higher government spending means higher demand on the economy, which means upward pressure on inflation for us and vice versa. So that's a nice simple one. But then it becomes far more complex because how did they raise their revenue? Was it through increased taxes? Was it through increased funding and spending and what are the nature of the spending that they're doing? Is it long term infrastructure, productive capacity, crowding or is it more short term welfare spending or whatever it is? So it's always a complex picture. Over recent times it's been broadly neutral if not slightly negative fiscal impulse. Looking forward we see a risk to the upside because of the cyclical place we're in at the moment.
Media: We are looking at a recession and you're talking about the employment market being unsustainable. You are talking about the fact that wage inflation needs to drop, which means that obviously workers are going to have to take real wage cuts. Is there another way of doing this? Is this the only way that we get inflation under control?
Adrian Orr: In terms of there are many, many ways you could do it. There are not many tools we actually have though. The most simple way of maintaining inflation is having very low and stable inflation and wage expectations so that people aren't rushing to have wages catching up to inflation that then just catch up to wages and that continuous heinous spiral that is no one's friend. So we are here to stop that spiral. We can only stop it using the instruments we have, which is the interest rates and it's a blunt tool and there are real wage, real employment, real activity implications of that. That's the way through. Other sides are increasing competition, putting in lower inflation, increasing the productive capacity of the economy, having a much bigger supply side, increasing the actual resources that are available to us to produce our goods and services. As long as they are static and demand is too high, then we have no alternative but to actively work to reduce demand. The impact on the labour market will be a function of how quickly firms stop raising their prices and workers feel they don't need to be chasing higher wages in hindsight. So that's the full picture.
It truly is in the hands of price setters and wage setters. We can only react to what's in front of us.
Media: Alexa Cook from New Hub TV3. Can you please explain for the average Kiwi what the coming year might look like. How tough it might be? When there might be a recession and for how long?
Adrian Orr: So for New Zealand, I would say we are in a relatively strong position, that is globally and in a business cycle and we should never forget that. We have very sound and strong financial systems. We have the employment levels at record highs, we have household balance sheets in a strong position. Even with the recent decline in house prices, they are still well ahead of pre- COVID levels. So we are in a very strong starting position but demand is still running faster than what our economy can supply. So that level of activity has to slow. It will be still be at a strong high level of economic activity in New Zealand. It just can't keep growing at the growth rates we have seen recently. So in a relative sense, world class in an absolute sense, yeah, think harder about your spending, think about saving rather than consuming. I know that's a strange concept. Just cool the jets.
Media: And in terms of the recession, sorry, when, where, how long?
Adrian Orr: At our best estimate, we're much better at talking about the levels where things need to be as opposed to the timing where we are talking about a reasonably short period, two to three quarters of a shallow recession. And what I mean by shallow, half a percent down in GDP Q2 next year, another 0.3 following on. These are well within standard errors of GDP estimates on a quarterly basis. So I'm not sugarcoating it, we need to slow spending but remember the number one complaint out there at the moment is, "I can't find anyone to work for me." And this is one of the monetary policy implications of that statement.
Media: Janae Trane from the Herald. I just want to talk about the risks of perhaps responding too much to inflation and I just want to try to reconcile two different statements from the bank at the review of the monetary policy of the past five years. I think, Paul, I think, correct me if I'm wrong, you might have said that if the bank didn't stimulate as much as it did at the pandemic, we might have inflation in the six percents at the moment. So I read that to mean that the bank was putting quite a bit of weight on the offshore factors in terms of drivers of inflation, things that it can't control. But now we have quite an aggressive response to inflation.
Adrian Orr: I think you might have just had it upside down a bit. What we're saying is that our core inflation is too high. Let's just say that outright. Our core inflation is one of our better estimates is 5%, just north of 5%. That is too high irrelevant of when we started. That is homegrown, that is the interest rate sensitive part that mostly that we can influence through interest rates. A lot of the risk is just delivered to us via whatever else is happening globally. The comment, Paul, that you were making was-
Paul Conway: It was actually about if the Reserve Bank had a tightened sooner in 2021, which was one of the findings of that review was that with the benefit of hindsight, we could have tightened a bit sooner. But as you say, there are many factors driving inflation, monetary policy is one of them. So had that been the case, we would have marginally lower inflation today than what we currently do have.
Adrian Orr: But the real sticky stuff is that core homegrown.
Media: Okay, so you are quite confident that there is so much demand in the economy relative to supply that we need to whack the economy as hard as it's looking like will be the case.
Adrian Orr: We don't use the word wack and I'd also like to point out that's where wholesale interest rates have been for quite some time now. So really what are we doing? We're putting the peg in the sand to confirm where market pricing has been for some months now.
Media: Okay. And just on government spending, do you believe that the government need needs to increase, I mean, sorry, decrease quite substantially the amount of additional operational expenditure. We've got some events coming up that might shed light on that or are the levels at the moment just given as you say, the cost of everything's going up so it's taking more money to deliver the same level of service.
Adrian Orr: I would want and I certainly believe all members of parliament, not just those in government, truly understand the implications for monetary policy with any fiscal policy decision. Those fiscal policy decisions are theirs to make, not ours. And we just have to be recipients as I mentioned that all other things unchanged, higher spending will work for us. But then you have to work out that complication. Globally, this is, we are far from unique globally. The phrases have been targeted, tailored and temporary when they're talking about additional fiscal policies, if any are needed to support households through whatever particular domestic strife that various economies are finding out. So targeted to households or people who most need it, tailored to the particular concern, and temporary. Now, easy to say, extremely difficult to do with fiscal policy but the decisions are from elected officials, not us.
Media: Rebecca Howard from Business Desk. I just wondered how the end of the funding for lending programme fits into all this. I've seen comments from, I think it was Kiwi Bank saying that they thought the end of the programme was equivalent to roughly a 25 basis point rate hike. So did that figure in at all to your opting for 75 instead of a hundred?
Adrian Orr: So really importantly we take all of that into account when we set our interest rates. I would hate to think the Reserve Bank is surprised at the ending of its own programme. So I wouldn't put it past us but so that's factored into where we are. I agree it's small beer.
Karen Silk: Yeah. Yeah. The thing you've got to remember is that the flip provides funding at the OCR. So as the OCR goes up, so does the cost of that funding. Compared to wholesale markets, it is comparatively cheaper, there's no doubt. But you've got to remember it represents only circa 2% of total bank funding. And so it is very marginal in terms of the level of stimulus it offers and actually we have incorporated roughly five basis points into our OCR level and track.
Adrian Orr: So that was circa not 30.
Karen Silk: Yeah. Yes.
Media: Why didn't you opt for a hundred.
Adrian Orr: Mostly because the committee agreed that we can observe and continue to wait. 75 is a big move. We're back again soon. It's not like we have to walk away so it felt sufficient.
Media: Bernard Hiki from the [inaudible 00:28:46] Governor, could you talk about how much of a factor profit margin increases have been in the inflation story relative to wages?
Adrian Orr: Yeah, I don't want to drag it of so kind of a tautology really. You can, if your input costs are going up, you can absorb those and have lower margins or you can maintain those margins by putting your prices up. So clearly trying to preserve margins is a big part of the inflation dynamic that we are trying to head off at the moment. So that's the case and there lies in the continuous battle between owners of labour and owners of capital.
Media: So why then has the bank and its box, talked about the risks of a wage price spiral but hasn't necessarily talked about the risks of a profit price spiral?
Adrian Orr: We believe that generally it's an incredibly competitive market at the moment. The most competition is for labour and wage setting. Firms are competing against a broad range of people. Firms can't just go off and try and set their own profit margin. They can try and control their own internal costs.
Media: Tom Striker from Stuff again. We have three members of the monetary policy committee from the bank here today to talk about this decision, which is great. Would you encourage the three external members to also explain the decisions, why they supported the decision today and just separately to that, an assistant governor, former assistant governor to the [inaudible 00:30:34] bankers expressed supplies that the seven members have always been able to reach an agreement over the past few years and what are clearly very turbulent circumstances when the monetary policy statements you've released have dished up some surprises. What are we to make of that?
Adrian Orr: So the first one is we actually have all seven members of the monetary policy committee here. We've got two people who are here to support me who have certainly right through it but the others are in the front row here and we can do something to show our consensus but I won't make you do that. The monetary policy charter of which some journalists have chased me to ad nauseum as to whether I'm meeting it or not. In fact, written stories about how I'm not. Explicitly say that for the first 24 hours or so, it's the governor who is the spokesperson for monetary policy posts that people are able and free to talk and willing should they be willing to. And there's just a few human niceties, make sure other people know if you're talking and try not to say it was them, not me. So that's the basic components of it.
On the consensus, we spend over a week in a room going through a series of forecasts that are deliberately laid up to lead us to towards a decision that we can all live with. That store doesn't rule out a vote at all. We just have never felt the need to go to a vote. Now I've said that in front of my members is that's the case.
Media: Okay, thank you. So just to check I've got that correct. Apologies for not recognising the three members from the backs of their heads in front of me are. Hi. Will you be encouraging them then from the next 24 hours onwards to explain the decisions that they've reached? Would you be happy with that? Would you encourage them to do that?
Adrian Orr: No, they are free, independent, wise people. They can choose to talk when they need to or wish to. I am not their master.
Media: Thank you. Matthew Brockett from Bloomberg. So you're accelerating your tightening after already a year of rate hikes. Is that because you see the beginnings of a wage price spiral? Is that the fear that we're looking at a spiral that gets out of control or-
Adrian Orr: We certainly want to head off inflation expectations rising, which they are at the moment and remaining at a heightened level, which they are at the moment. That is our sole target. We need to get inflation down. All of the rest then follows for us on the way through. The longer inflation stays up, the more likely people are going to be demanding for higher nominal wages. And if that starts to lead inflation then we really are in a position. At the moment we see wages lagging inflation. So it's inflation that worries us.
Media: So given that you've had to recalculate and recalibrate at this late stage of what was described as a pretty advanced tightening cycle and you're saying you're committed to meeting your inflation objectives, does that mean you'll do whatever it takes that you will drive the economy into a deeper recession if necessary to get-
Adrian Orr: Well, you're talking tough. Of course we're going to try to meet our remit and we want to do it with all of our remit, without creating unnecessary volatility and output interest rates in the exchange rate and using the horizon that matters to us. We are mature in our tightening cycle. February, March, April next year according to our projections is a lot closer than the beginning of the tightening cycle. So as you can see, we are there And you should also... I know you understand as well, we started from a position of well below any sense of neutral. So you had to go a long way just to get to the start line and we're be going a long way quickly. What have we been finding? New shocks keep arriving. The world just doesn't stop and let us catch up. And the new shocks that have been arriving, the Russia's Ukraine, the food, the energy, the weather price shocks and now the incredible labour shortages. So we have to keep adjusting, adopting but we are well down the path of the tightening cycle.
Media: And just a final one, do you have some assessment of where this new higher level of the neutral interest rate is?
Adrian Orr: We provide a projection for you in this document.
Media: I haven't had time to read it yet.
Adrian Orr: I'm sorry about that.
Media: Off the back of that perhaps what are the risks to the housing market with these outsized rate hikes? Your forecast don't show much of a deterioration in house prices despite today's changes and interest rate projections.
Adrian Orr: Yeah we have, I think our guesstimate and I put it up there because we remind the audience we don't target house prices. Our guesstimate based on what we're seeing is that house prices would have fallen 20% from their peak in November to their trough in
Paul Conway: Trough is mid next year would be the trough, for the full 20%.
Adrian Orr: I think we're 11% down. Rebecca, sorry, bringing the audience in it.
Paul Conway: 11.4% down from the [inaudible 00:36:00] accuracy.
Adrian Orr: Of that 20, we're slightly over halfway on that journey of house prices. One to go. Yep.
Media: You've got 125 basis points priced in as far as the track goes to the OCR at 5.5. Could we see another 75 basis point move in February? How quickly do we need to get to 5.5?
Adrian Orr: Yeah, so we're very eager to get to a position where we can watch, worry and wait and we can feel confident that inflation will be worn down. Inflation is no one's friend and so we want to get there sooner. That's why you're seeing quite a steep forward path for the official cash rate. Likewise, options are valuable. We will revisit the data come February. So that's the nature of this challenge. So want to thank you all very, very much and I'm sorry you've got hands up so. If we just make them quick.
Media: Thank you, Jenae again from the Herald. Just a question about the bank's settlement accounts with the Reserve Bank, these have become quite large obviously due to all the stimulus provided and are due to decrease. But I'm just wondering whether the Reserve Bank would give any consideration to paying banks a lower amount than OCR on part of those balances in terms of to save taxpayers money. Of course you don't want it to affect the transmission of monetary policy but it could be a saving. Do you have any thoughts around that?
Karen Silk: So the OCR is our primary tool to affect monetary policy. So if we started to pay less in terms of the settlement cash balances, then we're going to start impacting on overnight cash rates, which are obviously the indicator that as part of that transmission into wholesale rates and then into retail rates. So no, that would make no sense. It would go be contrary to trying to tie it to a monetary policy, monetary stance.
Media: Just a quick question on this difference between the retail rates and the wholesale rates. The comment from the committee that the retail rates have not risen as much as the wholesale rates would imply, could you give us a sense of how much of a difference there is there and therefore how much you'd like them to catch up?
Karen Silk: So what you've seen is a narrowing between the wholesale rate, so the swap curve and the retail lending rates. And certainly it's much narrower than historically. As I said earlier, that's been driven by the fact that banks are very well funded. The mix of funding that they have is quite heavily weighted towards those lower transactional balances. So that means that the banks are able to still generate the same level of net interest rate margin but they're actually generating it because the funding costs are lower because of the mix, the funding that they've got at this point in time.
Adrian Orr: So-
Karen Silk: I think we've got that in there but I think it's narrowed to about, I just can't remember off the top of my head, it might be about a hundred points or something like that. We can come back to you and let you know what that is.
Adrian Orr: Again, these are estimates and the bottom line is those banks need to rely more on wholesale funding as they go forward, they'll have to pay the wholesale price of funding.
Karen Silk: Yep. That will normalise over the forecast period is what we're saying.
Adrian Orr: Okay, wonderful. Thank you very, very much, everyone and may you have a wonderful and sensibly spending Christmas. Thank you.
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