New Zealand central bank to consider housing in rate setting in move to cool prices

Soaring house prices have raised concerns that first-time buyers are being locked out of the market. PHOTO: BLOOMBERG

WELLINGTON (BLOOMBERG) - New Zealand's government will require the central bank to take account of house prices when it sets interest rates, stepping up efforts to rein in a rampant property market.

The Reserve Bank's monetary policy remit will be changed so that the bank considers "the impact on housing when making monetary and financial policy decisions," Finance Minister Grant Robertson said in a statement on Thursday (Feb 25).

The New Zealand dollar rose to its highest since 2017 as investors saw the move restricting the RBNZ's ability to run loose monetary policy. The kiwi dollar jumped about a third of a US cent to 74.55 cents, its highest since August 2017.

The government is trying to cool an overheating housing market, which has been fueled by record-low borrowing costs after the RBNZ responded to the coronavirus pandemic by slashing its cash rate and embarking on quantitative easing. While many central banks are required to have consideration for financial stability in addition to their inflation targets, an explicit requirement to take house prices into account is unusual.

RBNZ Governor Adrian Orr pushed back against Mr Robertson's initial proposal last year, saying that forcing the bank to consider house prices when setting rates could lead to below-target employment and inflation.

Mr Robertson said on Thusrday that the RBNZ's objectives and mandate remain the same, which is to maintain price stability, support full employment and promote a sound and stable financial system.

The Monetary Policy Committee "retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes," he said. "The bank will have to take into account the government's objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers."

Mr Robertson also issued a direction under the Reserve Bank Act requiring the bank to have regard to government policy on housing in relation to its financial policy functions.

In a statement on Thursday, the RBNZ said it "welcomes the direction it has received today from the Minister of Finance." It said changes to financial stability policy are "in tune with our recent advice."

The bank acknowledged the change to its monetary policy remit but noted its targets "remain unchanged."

"The adjustments increase the focus on understanding and communicating the impact of the bank's decisions on house price sustainability," Mr Orr said in the statement. "We have a long-standing commitment to transparency about our policy actions and approaches, and this will continue."

Soaring house prices have raised concerns that first-time buyers are being locked out of the market. Much of the surge has been attributed to investors taking advantage of low interest rates.

The RBNZ, which predicts prices will rise 22 per cent in the year through June, is reinstating mortgage lending restrictions and will tighten them further for investors from May 1.

Mr Orr in December recommended that the bank be required to address the issue of rapid house-price inflation via financial policy, and requested it be allowed to add debt-to-income ratios to its macro-prudential toolkit.

Mr Robertson said on Thursday he has asked the RBNZ to provide advice on interest-only mortgages and debt-to-income ratios. He would want the latter to apply only to investors, he said.

"Today's announcement is just the first step as the government considers broader advice about how to cool the housing market," Mr Robertson said. "We know the rapid increases we have seen in recent months are not sustainable, which has meant many first-home buyers are struggling to access the market. We'll be making further announcements in the coming weeks on other policy responses."

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