By Praveen Menon
WELLINGTON (Reuters) -New Zealand’s central bank on Friday rebuffed a government call for it to add house prices to its monetary policy remit, despite growing concerns about a property market bubble.
Finance Minister Grant Robertson last month asked the bank to step in to help rein in a surge in home prices driven by record low interest rates and fiscal stimulus to support the pandemic-hit economy.
However, Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr warned the proposal could have negative trade-offs, particularly on the government’s aims of housing New Zealanders, and reducing inequality.
“Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency…,” Orr added in a response to Robertson, which was made public on Friday.
Targeting higher interest rates to cool housing would lead to lower employment, which most affects those at the margins of the labour market like Maori, Pasifika, women and youth, he said.
Other trade-offs could be a higher New Zealand dollar exchange rate and lower growth in housing supply.
Finance Minister Robertson said he would consider Governor Orr’s response and “make announcements” in the New Year.
The RBNZ this year cut interest rates to record lows, eased mortgage lending curbs and pumped NZ$100 billion ($70.4 billion) into a quantitative easing programme to boost the economy.
The moves fueled an unprecedented housing market boom, wrong-footing many economists who had expected a slowdown after years of rising prices. Median house prices have risen by double digits in the last few months, following a 90% hike in the past decade.
Orr said the bank would prefer an amendment to its financial policy remit if the government wanted to strengthen its influence on house prices.
“Adding a housing consideration to the financial policy remit could lead to policies that are more effective at supporting the government’s housing objectives, with lesser concern for policy trade-offs,” he said.
Orr noted the government already had a wide range of levers at its disposal. He proposed using debt-to-income (DTI) limits, which would limit borrowing relative to income, although he warned this could disadvantage lower income households.
($1 = 1.4098 New Zealand dollars)
(Reporting by Praveen Menon; editing by Richard Pullin)