The Reserve Bank may talk about targeting financial stability, but its implicit policy goals of improving housing affordability and squeezing investors out of the property market smack of a dogmatic approach to setting policy that lies well outside the Bank’s mandate.
It has been nine months since the Reserve Bank’s most recent policy child was brought into the world and, over this period, high loan-to-value residential lending has fallen by almost 80%. The limits for high-LVR mortgage lending were implemented to strengthen the financial system against housing market shocks and ease house price inflation. However, the restrictions have had a far greater effect on low deposit home loan issuances than perhaps initially intended. This article delves into why high-LVR loans, which once made up 25% of residential mortgage lending from banks, have reduced to levels far below that which the Reserve Bank policy allows.
Firstly, credit where credit’s due. In announcing its new monetary policy proposals, Labour has shown an admirable ability to think outside the square. Past criticism of the monetary policy framework has implied that the Reserve Bank’s focus on inflation is too narrow and that it should take more account of other factors such as unemployment or the exchange rate. Although Labour’s policy has pinpointed the current account deficit asan area the Reserve Bank needs to take more notice of, the Party has coupled this assertion with an exploration of alternative tools to interest rates for moderating the economic cycle.
The Reserve Bank should pre-empt a build-up in inflation by raisinginterest rates next week. Although demand pressures are on the rise, the realproblem is that New Zealand has entrenched high inflation expectations and awide-spread cost-plus mentality that threatens to undermine the effectiveimplementation of monetary policy if the Bank is too slow in reacting to thecurrent build-up in inflation pressures.
Although protecting the integrity of the financial sector underpins the development of LVRs, the reasoning provided by the Reserve Bank, seems to have morphed into being about protecting new, highly leveraged, entrants into the housing market from the risks of house price declines. I must admit hearing this type of justification for policy intervention fills me with considerable unease. There is no discussion of normal policy considerations like market failures or externalities. Instead it smacks of the glorious and all-knowing Bank protecting us from our own ignorance and excessive greed.
After a long period discussing tax, we are now up to thevery last tax article! The last type of taxation we are going to discuss isinflation tax. Now to do this we cannot just say "inflation is bad". Intruth, we need to ask how policy actions related to inflation and monetarypolicy can function as a tax, and why (as a result) economists often tend tosteer away from forms of inflation taxation and direct money financing ofdeficits when discussing optimal tax policies.
The recent BERL/NZ First report on changing the policy targets agreement (PTA) suggested that the importance of inflation targeting was gone – but this conclusion is simply wrong, and rests on a misunderstanding of what has been going on with the New Zealand economy in recent years. As a result, they confuse the facts about the New Zealand economy and come up with a fallacious recommendation to scrap inflation targeting to target a range of other factors.
Looking through the Reserve Bank’s latest Monetary Policy Statement, I was left wondering what degree of separation there should be between the Bank’s roles of monitoring financial stability and setting monetary policy. The Policy Targets Agreement between the government and the Reserve Bank specifies that setting monetary policy is primarily about ensuring that inflation is kept under control. Yet the Bank has become increasingly prone to bringing up financial stability issues when setting interest rates as the pressure on central banks to maintain market stability has intensified since the Global Financial Crisis.
On Thursday the Reserve Bank decided to leave interest rates unchanged but signaled that, due to the apparent resilience of the economy it was preparing to remove its Canterbury earthquake insurance. The Reserve Bank decreased the official cash rate (OCR) in March from 3.0 to 2.5%. The implication of Thursday’s announcement is that the Bank is very likely to increase the OCR back to 3.0% at their next monetary policy statement on 15 September.
Singapore’s monetary policy model, or even a modified version of it, would not be a good fit for New Zealand. Before explaining why, it is worth clarifying that low inflation is the ultimate objective of Singapore’s central bank, the Monetary Authority of Singapore (MAS), just like in New Zealand, Australia, Canada, the US, Britain and many other developed countries.