By Bernard Hickey
The International Monetary Fund's head of its annual mission to New Zealand, Brian Aitken, has told reporters in Wellington after a two week visit that the New Zealand dollar remained over-valued by around 15% and was likely to stay that way for at least a year or two as monetary policy was very loose elsewhere and international investors saw New Zealand as a safe haven investment.
Aitken said the Fund approved the government and Reserve Bank's fiscal and monetary policy settings, but had noted the risk strong house price inflation in Auckland could turn into a housing bubble.
The IMF saw economic growth this year of 2.25% with low inflation, in part because the persistently high New Zealand dollar was suppressing imported inflation.
"We're pretty happy with the monetary policy and fiscal policy mix, and with the direction of fiscal policy. It seems to be on track," Aitken told reporters, pointing to the government's plans to get back to surplus by 2014/15 and to keep net government debt below 30% of GDP.
However, he said there was flexibility for the government to respond to a shock with fiscal policy, although the IMF preferred the use of monetary policy to fiscal policy for short term issues.
"Let monetary policy do the heavy lifting with short term macro-economic management," he said.
Aitken said there was a risk a surge in the housing market turning into a "self reinforcing demand dynamic that could lead to over-shooting."
"Household credit growth, housing market turnover, and house price inflation have all recently picked up, particularly in Auckland where supply bottlenecks persist, and prices remain elevated by most measures of affordability," the IMF said in the concluding statement to its Article IV consultation with New Zealand.
"Recent developments also suggest some easing of mortgage lending standards. In these circumstances there is an emerging risk that sustained rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting," the IMF said.
"A shock to household incomes or to borrowing costs could cause a sudden price correction, reducing consumer confidence, worsening banks’ balance sheets, and impacting overall economic activity," it said.
Macro-prudential tools
The IMF welcomed the Reserve Bank's development of macro-prudential tools with the government and banks. The tools include loan to value ratio limits, extra capital for mortgage lending, tougher rules for core funding and a counter cyclical capital buffer. The framework for their use is expected to be in place by the middle of this year.
"The macro-prudential tools will help the Reserve Bank offset a build-up of the system wide risk," Aitken said.
However, he said the fund was cautious about the use of the tools, given they didn't have a long track record and could be circumvented if used for a long time.
"They should be used not very often, for not very long, and not as a substitute for the Official Cash Rate."
Currency strength
Aitken was asked about how over-valued New Zealand dollar was, given the IMF had previously said it was around 15% over-valued.
"It's in the 15% range. It's broadly similar to our assessment last year," he said, pointing to the relative strength and flexibility of the New Zealand economy and very loose monetary policy elsewhere.
Asked how long that over-valuation might go on for and when those underlying conditions might change, he said: "Not in the next year or two."
2 Comments
2011:
The International Monetary Fund is advising the government to widen New Zealand’s tax base for capital gains and to introduce a land tax.
The recommendation comes after a regular annual ten day visit from IMF Mission Chief for Australia and New Zealand Ray Brooks, and is set to be presented to Finance Minister Bill English on Monday afternoon.
The government has already ruled out a broader capital gains tax and a land tax in its response to the Tax Working Group's recommendations in Budget 2010. Instead it chose to lower income and corporate tax rates, increase GST, and make changes to building and capital depreciation rules.
PM says 'no'
Prime Minister John Key reiterated later a land tax and broader capital gains tax were still off the cards. Asked whether the implementation of one or the other could allow government to reduce income taxes to give people more income to spend, he replied:
“At the risk of repeating myself from last year, we looked at a land tax, and land taxes, one, reduce the value of land in New Zealand, by definition, and it has an impact on every single homeowner in New Zealand."
“ I wouldn’t have thought we’d want to do that on the back of a very weak housing market at the moment,” Key said at his Monday media briefing in the Beehive.
“Capital gains tax is already in place. They don’t produce you a lot of revenue upfront, so they wouldn’t actually pay for the Christchurch earthquake in day one, and in our view they are an inefficient form of taxation,” he said.
How strange though, that Bernard doesn't seem to have heard the main messages in the same way as the Herald did:
The International Monetary Fund counsels against "messing with" the monetary policy framework just because the Kiwi dollar is temporarily overvalued.
"We strongly feel the framework for monetary policy, including a flexible exchange rate, has been one of the reasons New Zealand is in a relatively resilient position, compared with some other countries," Bruce Aitken, who headed the IMF team which has been giving the economy its annual check-up over the past two weeks, said yesterday.
"Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path."
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.