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Reserve Bank to assess the 'balance' of its inflation and employment objectives, and look at how much consideration it should give to the impacts its monetary policy has on housing

Public Policy / news
Reserve Bank to assess the 'balance' of its inflation and employment objectives, and look at how much consideration it should give to the impacts its monetary policy has on housing
Adrian Orr

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. 

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53 Comments

1%-3% - that's an inflation target I think I can understand.

But has anyone figured out how to define "maximum sustainable employment"?

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Given we're tracking at 6% inflation, I'd say they haven't quick cracked defining 'accountable' yet. 

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*Nobody* involuntarily employed for longer than a couple of weeks. We were very close in the 1960s and 1970s when unemployment was 1%.

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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 ?

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Isn't it the level of surplus people required to ensure there is competition for jobs in order to minimize wage growth?

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NAIRU stands for the nonaccelerating inflation rate of unemployment. A favourite self justifying theory of the neolibs in Treasury, MBIE, the National party etc mostly unsupported/discredited by the global evidence over recent decades.

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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.  

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Why give the RBNZ more remit when it's failing miserably on maintaining its current objectives?

Yes sorry missed all my KPIs, still want a promotion, thanks. 

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I do wonder whether it was given more remit so that it could justify ignoring its primary remit. If it had only the inflation remit right now then the property speculators would be worried.

Might be a little bit much of a conspiracy though.

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I'd hardly call that view a conspiracy. I think you've probably nailed it. It also lessens the responsibility of both the RBNZ and the government as now they can just point fingers at each other and say 'you should fix it', while doing nothing. 

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Called playing at Politics

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they could hardly blame the maximum employment remit either considering we have very low unemployment, perhaps too low really.  Whether it be inflation, employment, or house prices, everything suggests higher rates than we currently have. 

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More media spin. This guy is not going to do any thing. 

He is just sitting warming his chair. 

 Just imagine the picture, Ching ching ching monkey playing in the brain. 

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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

 

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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... 

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Now you are Talking

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Wow. Money for free drives asset speculation and leads to runaway inflation. Now they want more think tank time. What are we paying these people for...?

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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

 

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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 .

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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. 

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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. 

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So basically Keith we have a situation where the left hand doesn't know what the right hand is doing ? This is going to end well.

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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.

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Along with inflation, employment and housing, Orr decided to add his own "cultural" mandate into the mix. Talk about losing sight of what a central bank should be focusing on. 

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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)

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Disagree Keith, the last decade of low inflation has been shit for everyone except the rich. Let’s go back 20 years ago where people got pay rises and could pay off debt and buy a house without dedicating their entire life to repayments. 

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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. 

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This is exactly how it will play out.  Now that prices are falling they must suddenly be considered.

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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…

 

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Haha, see?

They are getting ready to *pivot* (eye roll) to calling limits to OCR hikes.

Once house price falls get towards 10%....

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The awesome thing is that they will be impotent to stop the bubble bursting.

They have been able to build this big stupid house of cards up and up and up... but they won't be able to stop it collapsing.

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Bank of England calling for a halt in wage increases.

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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.

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Wow. Just....wow. And they wonder why people are getting angry.

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Yes as I mentioned yesterday I think we are now in the financial repression phase of the cycle with rising inflation and severely negative real interest rates. 

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After some of the biggest wealth transfers to the wealthy in history...they're all "NO, don't give the poors a little more!! That's horrid!"

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What's the bet nobody asks for pay rises, inflations still happens, but the differential is pocketed by the big lobby boys at the top?  

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Wow indeed, shouldn’t the Bank of England be controlling inflation through interest rates rather than blaming people for asking for pay rises! It’s like every reserve bank is run by a madman that doesn’t understand their job. 

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RBNZ should have gone big. Things really could be ugly now in 6 weeks time. I think Orr will pack it in this year, it was one of my predictions along with JA also walking the plank.

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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.

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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?

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The RB guvnors rating - P'Orr.

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 "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.

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Another round of endless consultations. Smooth talk, waffle, long on rhetorics, short on substance. What is that these guys in RBNZ should already know, for which they are paid handsomely, without having to consult others?

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"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.

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Excellent so we can dump the reserve bank and Orr just.let a basket average set the OCR and save a heap of wages and overheads at the same time . 

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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. 

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Exactly. The continual claim that the OCR would not have much effect on the housing market is rubbish but he keeps saying it.

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Surely the RBNZ can do something.

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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.

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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. 

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The Reserve Bank fighting inflation will cause a recession and it won't stop inflation.

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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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