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The Reserve Bank (RBNZ) says it will consider the government’s suggestion to take house prices into account when formulating monetary policy.
Finance Minister Grant Robertson on Tuesday morning wrote to RBNZ Governor Adrian Orr, suggesting that the Remit of the Monetary Policy Committee (MPC) be modified to require it to “avoid unnecessary instability” in house prices.
The RBNZ, around 4:40 pm, published a letter in response.
Orr welcomed the opportunity to participate and said he will “respond with thoughtful comments in due course.”
But he also defended the actions of the MPC.
He noted that lowering interest rates to boost house prices was a key way for the MPC to try to meet its inflation and employment targets.
“I can assure you that the MPC, in making its decisions, considers the potential impact of monetary policy on asset prices, including house prices. These are important transmission channels that affect employment and inflation, ”Orr said.
“Prices related to the housing market are also included in the consumer price index, for example, rents, fees, construction costs and housing transaction costs.”
Orr also noted that the RBNZ was consulting on the reintroduction of loan-to-value (LVR) restrictions to curb bank lending against property two months earlier than it previously said it would discuss the matter.
“Subprime home loans are also an important consideration for financial stability. For many years, we have identified the risk that heavily indebted households and businesses can pose to the financial system. This concern is the reason why we recently stated our intention to reinstate loan-to-value restrictions for riskier lenders, particularly real estate investors, ”he said.
Orr put some of the onus on the government to tackle house price inflation.
“As I have said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge. There are many long-term structural problems at stake, ”he said.
The letter ended: “Our monetary policy actions have been, and will continue to be, effective in supporting the economy through the COVID-19 economic shock.
“Effective monetary policy is incredibly important to our shared goal of promoting the prosperity and well-being of all New Zealanders.”
Orr’s letter caused the New Zealand dollar, which soared after Robertson’s announcement, to retreat slightly from 69.9 cents to 69.7 cents.
See a copy of the letter here.
