New Zealand proposes changes to central bank remit


Possible changes: Traffic travels past the Reserve Bank of New Zealand on The Terrace in Wellington. The bank says it will review the government’s request to amend its remit to rein in an overheating property market. — Bloomberg

WELLINGTON: New Zealand’s government has proposed adding house prices to the central bank’s remit to rein in an overheating property market, prompting investors to reduce bets on lower interest rates. The local dollar jumped.

Finance minister Grant Robertson said yesterday he has written to Reserve Bank governor Adrian Orr, asking him to consider amending the bank’s remit to include stability in house prices as a factor for monetary policy. He said the government wants to make the changes soon, “so I would request that you gave it your earliest possible consideration.”

“With an extended period of low interest rates, and some time before housing supply can catch up with demand, now is the time to consider how the Reserve Bank may contribute to a stable housing market, ” Robertson said.

“I want to be clear I am not proposing any changes to the mandate or the independence of the Reserve Bank.”

New Zealand house prices, which only months ago were expected to drop during the coronavirus pandemic, have soared as the reserve bank has aggressively cut interest rates to spur the economy out of recession.

It’s a dynamic that’s emerging in other countries with similar housing markets. But while many central banks are required to have consideration for financial stability in addition to their inflation targets, an explicit requirement to ensure stable house prices would be unusual.

“We looked to see if there were any mandates that explicitly look at house prices, and we couldn’t find one, ” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “There was obviously a lot of political pressure on the government to at least acknowledge the concerns people had about affordability and inequality.”

The New Zealand dollar jumped as much as half a US cent on Robertson’s statement, to its highest since 2018, as traders saw less chance of further the reserve bank easing. It bought 69.70 cents at 5pm in Wellington. Bond yields and swap rates rose.

In a letter to Robertson later, Orr said the reserve bank will review his request. But he added that the Monetary Policy Committee (MPC) already takes house prices into consideration when setting policy to achieve its inflation and employment mandates.

“I can assure you that the MPC, in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices, ” Orr wrote. “These are important transmission channels that affect employment and inflation.”

The reserve bank has cut its official cash rate (OCR) to 0.25% and embarked on quantitative easing to drive down interest rates. Next month, it will begin offering cheap loans to banks to reduce borrowing costs further, and it hasn’t ruled out taking its cash rate into negative territory next year.

“If the market moves to further reduce the odds of a negative OCR, I think that would probably be a rational and reasonable response, ” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.

“We’re in an unprecedented situation which no one would have foreseen – a house price boom in a recession. It is an awkward situation in terms of the trade-offs between monetary and financial stability policy.”

The average house price rose an annual 8% in October to NZ$753,000 (US$525,000), the fastest gain in more than three years, while sales soared 25% from a year earlier in the busiest month since 2016.

In his letter to Orr, Robertson said house price instability “is harmful to our aims of reduced inequality and poverty.” The alternative policy tools the reserve bank is using were not envisaged when its remit was first published in 2019, he said.

“I believe it is right that we consider how these tools might be impacting the housing market, with regard to housing price inflation, ” Robertson wrote. Specifically, he proposed adding “house prices” to a clause in the remit. — Bloomberg

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