Grant Robertson’s RBNZ policy change ‘goes too far’ – economist

Independent economist Cameron Bagrie says the Government has “gone too far” with its Reserve Bank policy changes and risks undermining its independence.

Finance Minister Grant Robertson announced today that changes have been made to the Bank’s Monetary Policy Committee’s remit requiring it to take into account government policy relating to more sustainable house prices, while working towards its objectives.

Bagrie says he is not opposed to house prices being considered in the remit but the inclusion of the term “government policy” was a concern.

House prices used to be a consideration in the remit, Bagrie said.

“Why didn’t they just reinsert that,” he said. “What they’ve reinserted is a phrase that risks encroaching on the independence of the Reserve Bank.”

Today’s announcement followed a letter Robertson wrote to RBNZ Governor Adrian Orr in November suggesting a change to the rules under which it operates, to take heed of the impact of any monetary policy on house prices.

The Reserve Bank already considers risks around residential housing debt when it assesses the nation’s financial stability.

A direction has been issued (under section 68B of the Reserve Bank Act) to the Reserve Bank requiring it to have regard to government policy on housing in relation to its financial policy functions.

The remit now says the RBNZ will need to “assess the effect of its monetary policy decisions on the Government’s policy set out in subclause 3.”

Subclause 3 says: “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.”

Orr said the RBNZ welcomed the new direction.

“The minister’s direction is in tune with our recent advice to the Government in which we detailed the many influences on house prices, including the actions of the Reserve Bank,” Orr said.

He said the adjustments would increase the focus on understanding and communicating the impact of the Bank’s decisions on house price sustainability.

The Reserve Bank’s objectives and mandate remain the same, which is to maintain price stability, support full employment and promote a sound and stable financial system.

“It’s is a fine line,” said Bagrie. “You’ve only got to look at the result. Financial conditions have tightened in the past 24 hours, which is not in the spirit of what the Reserve Bank was trying to achieve.”

The Kiwi dollar rose around one third of a US cent to 74.55 cents, its highest level since August 2017.

Bond yields and swap rates also rose.

Yesterday, the Reserve Bank left the official cash rate on hold at a record low of 0.25 per cent and warned monetary policy stimulus would be required for some time yet.

Its Monetary Policy Statement was widely interpreted as an attempt to push back against overly exuberant financial market anticipation that the economy was recovering and rates would rise.

Robertson said today’s announcement was “the first step” as the Government considers broader advice about how to cool the housing market.

“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,” he said.

“We’ll be making further announcements in the coming weeks on other policy responses.”

Following the RBNZ’s request that the Government allow it to make use of tools such as debt-to-income ratio limits, the minister has asked for further advice on how the bank might implement such tools.

“I have made clear that in principle I would want these to apply only to investors,” Robertson said.

“It’s important that any potential restrictions do not disproportionately affect first-home buyers and low-income borrowers.”

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