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Finance Minister Grant Robertson proposes to demand that the Reserve Bank (RBNZ) “avoid unnecessary instability” in house prices, as it works to meet its inflation and employment targets.
Robertson wrote to RBNZ Governor Adrian Orr on Tuesday, requesting comment on his suggestion to modify the Remit wording for the Monetary Policy Committee (MPC).
the Refer, published in February 2019, is issued by the Minister of Finance under the Reserve Bank Law.
Robertson would like to change Section 2b to say: “In pursuing operational objectives, the MPC shall … Seek to avoid unnecessary instability in production, interest rates, the exchange rate, and house prices.”
Currently, the Remit does not include the words “house prices”.
Robertson asked Orr for comments on the suggestion and said he also welcomed views on alternative proposals “with respect to the Reserve Bank’s monetary or financial policy that would help address our concerns.”
“I am concerned that the recent rapid escalation in house prices, and the forecasts that this will continue, are affecting the Government’s ability to meet the economic objective set in the Remit,” he said.
“I am also concerned about the potential that these price increases could present a financial stability risk for the economy, particularly when monetary policy returns to more normal scenarios.
“Instability in house prices is detrimental to our goals of reducing inequality and poverty, and is also likely to negatively affect the government’s goal of creating a more productive and inclusive economy.”
If changes are agreed, Robertson said he wanted them to be implemented soon: “I would ask for your consideration as soon as possible,” he told Orr.
The New Zealand dollar jumped from 69.3 cents to 69.7 cents on the news. ANZ chief economist Sharon Zollner said this indicated that the market expected the OCR cuts to be less likely.
Robertson emphasized that he was not proposing to change the MPC’s price stability and employment targets. He also underscored the importance of RBNZ’s independence.
Taking some responsibility for rising house prices, he said he directed the Treasury to consider more measures on the demand side to address asset price inflation.
These could include re-examining the bright line test. Robertson reiterated the government’s commitment not to introduce new taxes.
He ordered the Treasury to report before the end of the year.
See a copy of the letter Robertson sent to Orr here.
As a background, the Policy Objectives Agreement, which preceded the current Remit, required the RBNZ to “monitor” asset prices when conducting monetary policy.
However, the Treasury recommended removing the words “asset prices.” Their advice for Robertson in 2018 it was:
“[T]This requirement to monitor asset prices does not fit well with the PTA as it is not related to the objective of the policy. It could also be argued that the reference to asset prices is superfluous as it is covered by the requirement to take into account financial stability that is included in the Act and the PTA. On the other hand, the provision is not detrimental given that the Bank will need to monitor prices to fulfill its functions. In summary, we recommend removing this clause as it is unnecessary and would help simplify the document. “
Here is a copy of a Robertson press release:
New Zealand’s stronger-than-expected economic performance has been reflected in demand for housing, so the government will review the housing configuration to improve market access, Finance Minister Grant Robertson announced today.
“Our goal is to improve access to the housing market for first-time home buyers and to ensure that house price growth does not distort the effectiveness of our overall economic rebuilding, which we want to focus on the productive side of the economy. .
“We have been clear about the policy responses that we are not prepared to consider, but there are other options that need to be investigated.
“Overly restrictive planning rules are one of the causes of high house prices and the replacement of the RMA is a priority to address that. We will build on the National Policy Statement on Urban Development and examine other potential barriers to affordable housing. Minister Woods is working on new and innovative ways to increase supply.
“I have also sought advice on other demand-side measures that may add to the initiatives we have already taken. I look forward to receiving that advice towards the end of the year and will discuss it with the Cabinet as soon as possible after that, ”said Grant Robertson.
“Today I can also confirm that I have written to the Governor of the Reserve Bank to seek his advice on the possible ways in which the Reserve Bank can help the Government to achieve its economic objectives, particularly in relation to house prices . One proposal on which I am seeking advice from the Reserve Bank is whether to include stability in house prices as a factor to consider in the Remit when formulating monetary policy.
“With a prolonged 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 can contribute to a stable housing market. Carrying out this work is not to suggest that the Reserve Bank is responsible for house prices, but simply that it should take into account something that is influenced by monetary policy.
“I want to make it clear that I am not proposing any change in the mandate or independence of the Reserve Bank.
“I want to acknowledge that the Reserve Bank’s approach during COVID-19 has served New Zealand incredibly well. I continue to support their independence and mandate. It is critical that you take, as requested by Remit, an approach that looks beyond the short term, ”said Grant Robertson.
