Housing in Reserve Bank remit would make negative interest rates less likely
Tuesday, 24 November 2020
A suggestion that the Reserve Bank could have its remit changed to consider house price stability makes it less likely the official cash rate will slip below zero next year, economists say.
Finance Minister Grant Robertson confirmed on Tuesday he had written to Reserve Bank governor Adrian Orr expressing his concern about house price growth. He suggested that, while the bank should continue to target inflation and employment, it could also have an eye on house price stability.
Orr responded by saying that the bank already gave consideration to the potential impact of monetary policy on asset prices, including house prices.
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Infometrics chief forecaster Gareth Kiernan said that if house prices were brought into the Reserve Bank’s remit that would reduce the probability of the Reserve Bank easing monetary policy further next year, and dropping the official cash rate below zero.
It has been predicted that the OCR could fall to minus 0.5 per cent over the first half of next year.
“If it has to try to keep house prices running at a more reasonable level, that will make it harder for interest rates to be cut again. Given financial markets have priced in the official cash rate going to minus 0.5 per cent … you would expect that to put upward pressure on short-term rates.”
Kiernan said the effect might only be 25 or 50 basis points.
It would be less noticeable on terms in the two- or three-year range, he said, where the central bank’s new Funding for Lending Programme was likely to take effect, allowing cheaper borrowing.
Kiernan said it was step in the right direction. For the Reserve Bank to target price inflation but not consider the cost of housing was problematic.
He said the Government ultimately had to take responsibility for what happened in the housing market. “There are a thousand things you can blame the crisis on, the Resource Management Act, construction costs, zoning, the tax system … these are all issues that central government has to look at. I hope Government does not say it has added this to the Reserve Bank’s mandate so it is dealt with it.”
Westpac chief economist Dominick Stephens said he welcomed the acknowledgement that interest rates were an important driver of what was happening to house prices. “I do wonder what he expects the Reserve Bank to be able to do … the list of things it needs to pay attention to gets longer by the year. They are often in conflict.”
An increase in interest rates could cause higher unemployment and could mean the bank missed its inflation target. “There is a lot more to think about there.”
The New Zealand dollar surged when Robertson’s letter was revealed.
ANZ chief economist Sharon Zollner agreed it would make a negative interest rate “less and less likely”. “That is a good thing; negative interest rates are inherently risky.”
It was also a sign that the economy had been doing better than expected, and monetary and fiscal policy had done its job so far.
“But monetary policy and fiscal policy work by bringing forward spending from the future and at some point that future wil come. That is a problem for another day. The economic outlook is much rosier than it was six or even three months ago.”
She said that in that context it was not clear whether the concern was that the economy was fine and the bank was creating a housing bubble with low rates, or whether it was not fine and there was a bubble being created. “Either way it is problematic.”