New Zealand Government Forces Central Bank to Include Housing In Rate Setting
A 'Sold' sign for Tommy's Real Estate outside a property in the Churton Park suburb of Wellington, New Zealand. (Photographer: Mark Coote/Bloomberg)

New Zealand Government Forces Central Bank to Include Housing In Rate Setting

New Zealand’s government will require the central bank to take account of rampant house prices when it sets interest rates, a change that may restrict its ability to run loose monetary policy.

The Reserve Bank’s remit will be amended so that the bank considers “the impact on housing when making monetary and financial policy decisions,” Finance Minister Grant Robertson said in a statement Thursday in Wellington. The New Zealand dollar jumped to its highest since 2017 as investors ramped up bets on higher interest rates.

The government is under political pressure to cool an overheating housing market, which has been fueled by record-low borrowing costs after the RBNZ responded to the coronavirus pandemic by slashing its cash rate and embarking on quantitative easing. Governor Adrian Orr pushed back against Robertson’s proposal when it was first made last year, saying that forcing the bank to consider house prices when setting rates could lead to below-target employment and inflation.

New Zealand Government Forces Central Bank to Include Housing In Rate Setting

“The more objectives you’ve got, the more complicated it can be to meet all those objectives,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “Inflation and employment is what they will focus on, but they have to think harder about how their decisions impact on the housing market.”

The kiwi dollar jumped about a third of a U.S. cent to 74.55 cents, its highest since August 2017. Bond yields and swap rates also rose on news of the changed remit, which comes into force on March 1. Investors are now pricing a 30% chance of a rate hike in November, even though the RBNZ yesterday sought to damp bets on tighter policy and said it could cut rates further if needed.

Robertson ‘In Charge’

“The market is saying no more rate cuts, so push the kiwi higher,” said Jason Wong, currency strategist at Bank of New Zealand in Wellington. “The RBNZ has shown its independence by saying ‘we don’t like this measure,’ but they are going to have to live with it because the finance minister’s in charge.”

Robertson said today that the RBNZ’s objectives and mandate remain the same, which is to maintain price stability, support full employment and promote a sound and stable financial system.

But a change to the Monetary Policy Committee’s remit will force it to “assess the effect of its monetary policy decisions on the government’s policy.” A clause has been added stating that the government’s policy “is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.”

“The committee retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes,” Robertson said.

Robertson also issued a direction under the Reserve Bank Act requiring the bank to have regard to government policy on housing in relation to its financial policy functions.

In a statement Thursday, the RBNZ said it “welcomes the direction it has received today from the Minister of Finance.” It said changes to financial stability policy are “in tune with our recent advice.”

The bank acknowledged the change to its monetary policy remit but noted its targets “remain unchanged.”

“The adjustments increase the focus on understanding and communicating the impact of the bank’s decisions on house price sustainability,” Orr said in the statement. “We have a long-standing commitment to transparency about our policy actions and approaches, and this will continue.”

Soaring house prices have raised concerns that first-time buyers are being locked out of the market. Much of the surge has been attributed to investors taking advantage of low interest rates.

The RBNZ, which predicts prices will rise 22% in the year through June, is reinstating mortgage lending restrictions and will tighten them further for investors from May 1.

Orr in December recommended that the bank be required to address the issue of rapid house-price inflation via financial policy, and requested it be allowed to add debt-to-income ratios to its macro-prudential toolkit.

Robertson said today he has asked the RBNZ to provide advice on interest-only mortgages and debt-to-income ratios. He would want the latter to apply only to investors, he said.

“Today’s announcement is just the first step as the government considers broader advice about how to cool the housing market,” Robertson said. “We know the rapid increases we have seen in recent months are not sustainable, which has meant many first-home buyers are struggling to access the market. We’ll be making further announcements in the coming weeks on other policy responses.”

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