The Reserve Bank (RBNZ) is considering whether or not to suggest the government broadens its monetary policy remit.
The central bank is embarking on a review of its monetary policy framework, which it's legally required to do every five years.
Speaking at an economics forum hosted by Waikato University on Friday morning, Governor Adrian Orr said the review will “be an opportunity to consider how the Reserve Bank balances our inflation and employment objectives, and what weight, if any, should be put on secondary considerations such as distributional impacts and housing”.
Currently the RBNZ’s Monetary Policy Committee is responsible for targeting price stability (an annual rise in the Consumers Price Index of between 1% and 3%) and “maximum sustainable employment”.
As of 2021, the government has also required it to assess the impacts its monetary policy has on house prices.
Orr said, “The purpose of these regular reviews is to ensure we are an accountable and transparent central bank, the monetary policy framework remains fit for purpose, and the Monetary Policy Committee is well placed to achieve our objectives.”
He said the review process has two parts. It will assess the performance of monetary policy over the past five years, and advise the finance minister on whether the RBNZ believes any changes should be made to its remit when it's next renewed.
'Small incremental improvements'
On the house price front, Orr suggested the RBNZ ability to influence these was limited.
“Our research shows that it is the persistent decline in global nominal interest rates that have most affected asset prices, whereas changes in New Zealand’s OCR relative to this global neutral level have significantly less effect,” he said.
“New Zealand’s monetary policy does not determine the level of global interest rates. The long-term decline in nominal interest rates have been driven by low and stable global inflation, and various structural factors such as demographics and productivity that affect future real growth and the balance between savings and investment.
“A key reason why lower global interest rates have had such a significant impact on house prices in New Zealand has been the lack of supply of new housing. Land-use restrictions and other constraints on building have restrained the supply of land and housing.
“It is important to note that this trend has recently turned. Building consents are at record levels, at a time when population growth in 2021 was just 0.5% (its lowest level since 1988), mortgage interest rates are rising, and there is tighter access to credit.”
Answering a question about the effect loose monetary policy had on house prices, Orr further suggested he believed the ball was in the government’s court to address the issue by building more houses and broadening and deepening New Zealand’s capital markets so that housing isn’t relied up so much as an investment and collateral against which banks lend.
“It’s really small incremental improvements you would make around monetary policy relative to significant changes you can make outside of this institution,” Orr said.
Consultation to begin mid-year
The first round of public consultation will begin in the middle of the year and "will take stock of the structural changes that have affected the context for monetary policy, and reflect on the lessons from the operation of monetary policy in recent history".
“The feedback from this consultation will be used to inform the scope of options for changes to the remit, which will be part of the second round of consultation later in the year," Orr said.
53 Comments
The sustainable employment thing is really about the unemployment number only getting to be so low. basically the 3.2% are people that are left are "unemployable" so if job vacancies keep rising there are simply not enough people to fill the positions which is compounded by closed borders. We just run out of workers in their mind. Maybe "maximum sustainable re-employment" is a better fit ?
This clown should have thought about it a couple of years ago.
Also, he could "reflect on the lessons from the operation of monetary policy in recent history" right now, not in the far future. Maybe he would then acknowledge how his reckless un-necessarily ultra-loose monetary policy has significantly contributed to creating a dangerously unbalanced and fragile economy, weighted down by an almighty housing Ponzi and rampant inflation.
You are right about the Media Spin. It will not matter what he does the Media will spin it the other way. The Governor is walking a tight rope, and letting the big players sorting out for themselves and they are not doing a very good job. Looking for too much Govt assistance and subsidies
RBNZ couldn't even meet his current mandate, why should they add impact of houses into its monetary policy consideration?
Not a big fan of National, but Christopher Luxon made a solid point that changing RBNZ's mandate to only focus on price stability.
The timing is so interesting, just when housing market is turning and OCR is going up...
As long as the RBNZ has multiple objectives then it has no clear objective.
The role of monetary policy should be to maintain price stability, and in my opinion that includes lowering the current range to a mid-point of no more than 1%.
It is up to the Government, not the RBNZ, to set this objective. The role of the RBNZ is then to implement monetary policy within this objective.
The Government has other tools to deal with the other objectives.
KeithW
Agree 100% KW the reserve bank should only be concerned with maintaining price stability around 1- 2 % the other issues housing , employment should be run by government policy that is what they are elected for , the reserve bank officials are not elected by the people. If they were to stick to a narrowed mandate maybe they could slim down the operating costs and focus on what they are supposedly employed for . Their performance at this time would have to be rated a fail and some accountability should be expected by the public they are paid by .
Does the Reserve Bank and it's economists even know the true drivers of "price" instability?
And why should price stability not include asset "values" given they would be the biggest driver of credit growth and financial instability issues?
It would appear a massive paradigm shift in economic beliefs and values is what's really required.
Yes. The RBNZ having only the mandate of 'price stability' would work, if price stability was better defined.
But apparently a massive increase in living costs does not affect price stability. Massive inflation in the biggest expenses anyone has (housing and fuel) don't count as inflation.
It's profoundly stupid. It makes less sense the longer you look at it. It renders the RBNZ almost entirely redundant. It's as if the Police said, "we exist to prevent crime. By which we mean burglaries from apartments, and the illegal sale of cigarettes." And everyone else just accepted it, because stopping all the other crime was too complicated.
None of these people are serious.
Is there even such a thing as the 'general price level' any more? For example, tradeable goods and services have averaged 0% growth over the last ten years, whilst house prices have averaged 9% per annum and rents have increased steadily at around 3.5% - capped probably by what people can afford to pay without starving. Low skilled wages have increased on average 2.5% per annum (nice work minimum wage) whereas high skilled wages have crawled up just 1.5% per annum on average. The other drivers of domestic inflation are price gouging by companies with too much market power and Govt taxes on petrol, booze and fags (4% per annum)... and let's not forget that the carbon price is lurking.
Given this complexity, and the wildly different drivers of prices in different sectors, the idea that RBNZ can control the overall price level by nudging the OCR up and down seems a bit ridiculous.
My view is that central banks in countries that are bobbing along in the wake of bigger countries should focus on varying their OCR to support trade (in financial assets and goods and services) - whilst focusing domestically on controlling the cost and availability of credit to prevent asset bubbles, incentivise productive investment, and bring stability to the financial system.
Very true, particularly when those mandates are in direct competition. The idea that the RBNZ should be responsible for employment is just bonkers. Governments need to address this through fiscal policy.
I think we need to have a conversation about rebalancing the CPI to reflect actual inflation and increase the weighting towards non-tradable inflation (and fix hedonic index)
So the narrative now will be house prices are falling so we can’t raise rates…even though inflation is way outside its target.
Bit the opposite was true in the other direction. House prices are racing away out of control but there’s no inflation so we must push interest rates to zero.
That narrative is being pushed by ANZ already
Hiking interest rates in a falling housing market: 'That's a pretty big deal
It will be house price falls rather than borrowers’ ability to service their home loans that limits increases in the official cash rate, ANZ’s chief economist says.
https://i.stuff.co.nz/business/money/300525465/hiking-interest-rates-in…
Don't ask for a big pay rise, warns Bank of England boss.
https://www.bbc.com/news/business-60206564
Workers should not ask for big pay rises, to try and stop prices rising out of control, the Bank of England governor has told the BBC.
The whole argument of we have to lower rates because the rest of the world lowered rates is false. We lowered rates so that the government can borrow money cheaply... you may move in concert with other countries because of currencies,,, but we didn't have to go as low as we did. We also didn't have to do it at the same time we removed LVR restrictions and created the free money for foreign banks programme.. The RBNZ overcooked it and Orr is responsible... Watch, the result is coming to housing market near you,,, are we still going to do nothing about such poor performance.
The long-term decline in nominal interest rates have been driven by central bank's reactions to global financial bubbles and busts. We want consumers to believe they're wealthy so they borrow and consume. We need to pump asset values and speculation so financial institutions can keep the credit taps flowing. We really don't know how to manage any of this. Nor do we want to admit that none of it appears to create any stability, and in reality may actually heavily contribute to the problems we're continuously facing. We're a one trick pony, but if we add more tricks we can continue dazzling the crowd and shift the blame from our own incompetence.
Fixed it for you Mr Orr!
Meanwhile the financial institutions and corporate behemoths wield a significant amount of power and influence. What does this bode for financial stability and the average persons economic security?
"whereas changes in New Zealand’s OCR relative to this global neutral level have significantly less effect,” he said.
Who is he kidding? Of course our OCR is not the only factor in the absurd/obscene rise in house prices, but it sure as hell threw lots of fuel on the fire.
I find it hard to believe that I welcomed his appointment, but then I also wish this government a fair wind to have a real go at reducing the rampant inequality in NZ, my track record is none to good.
"Our research shows that it is the persistent decline in global nominal interest rates that have most affected asset prices... New Zealand’s monetary policy does not determine the level of global interest rates."
There we have it. Mr. Orr explained it in simple English.
Stop blaming the RBNZ for every ills or perceived deprivation in your life.
They have a higher calling than to pacify individual pet interests.
What a load of crap. So are they saying house prices would still be so high had they set the OCR to say 5%?
in a way it’s not really the RBNZs fault, they shouldn’t be required to drive inflation unless we are in serious risk of deflation which we never really achieved. Their target range should be much bigger IMO, the market should set rates to a point with the RBNZ stepping in in cases of deflation or high inflation rather than worrying about 1% inflation or 4% inflation, neither of which is really a problem.
Fair call Adrian, "Hey boss, you've given me equally weighted, conflicting objectives, can we talk about the balance?"
Question is, what will the boss do
- let the economy burn, while getting on top of inflation
- protect unemployment with low rates, and let asset prices rip
I suspect neither, and some un-strategic fence straddling is to be had.
Anyone remember the 50 point drop in ocr Aug 19. Leaving less room to move when we needed plus stoking asset inflation when there was no need. Now when a 50 point increase was needed they get cold feet.
Could they be about to review the inflation target...3 to 5% becomes the band. Shifting the goal posts to keep assets inflated.
Did Mr Orr
Withdrew the LVR and reinstate far too late
Stop (or reduce) the LSAPP when house prices increased by 20%
Started the FLProgramme at the end of 2020
Reduced the OCR by 0.75% in March 2020, to 0.25% and waited untill october 2021 to increase by 0.25%, to 0.50%.
Don't I wish that someone ask him some hard questions. More so when he says "Our research shows that it is the persistent decline in global nominal interest rates that have most affected asset prices........."
I fear that if our housing market collapses, NZ banks might be the first to go under.
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