RBNZ says continuation of non-Auckland house price rises could be a 'challenge' for macro-prudential policy; signals softer approach to inflation targeting

By David Hargreaves

The Reserve Bank’s indicating an increasing level of concern about the now sharply rising house values outside of Auckland.

Our central bank’s also indicating a softer approach to inflation targeting, and on meeting its Policy Targets Agreement with the Minister of Finance, which is inflation of between 1% and 3%. The RBNZ has been consistently missing its targets, with inflation having now been below 1% for nearly two years, while it hasn’t approached the target ‘midpoint’ of 2% for nearly six years.

The RBNZ’s widely expected to soon announce new macro-prudential measures aimed at the housing market, with speculation that it might increase the current deposit requirement of 30% for Auckland investors up to as much as 50%.

The central bank has till now appeared relatively sanguine about the recent resurgence of housing pressures outside of Auckland, stating in its Financial Stability Report issued last month that: “House prices have also begun increasing strongly in a number of regions across New Zealand, although house price-to-income ratios are generally much lower than in Auckland.

“The Reserve Bank is closely monitoring developments to assess whether further financial policy measures would be appropriate.”

However, in the bank’s new Statement of Intent official policy statement covering the period from this year to 2019, the RBNZ says: “House prices have been rising relatively rapidly in other parts of New Zealand, reflecting low mortgage interest rates and some displacement of activity away from Auckland.

“While house prices outside Auckland remain less stretched relative to income, a continuation of this trend could present challenges for macro-prudential policy.”

The rest of the country too?

These comments would appear to open the door to the RBNZ perhaps considering the introduction of the currently Auckland-specific investor rules in the rest of the country too. Another option for the central bank would be a reversal of loosening of the LVR ‘speed limits’ outside of Auckland that applied from November last year.

Banks are still limited to advancing no more than 10% of new lending in Auckland to mortgages with LVRs in excess of 80%, but this ‘speed limit’ was looesened to 15% elsewhere in the country with a view at the time – presumably now very much abandoned in the short term – of ultimately getting rid of the LVR restrictions altogether. The RBNZ could very easily, at a stroke, reapply the 10% speed limit to the rest of New Zealand.

A softer success measure

Meanwhile, the RBNZ, which has continually failed to meet inflation forecasts and targets has significantly changed the wording in the latest statement of corporate intent in its key “Goal, organisation outcomes, functions, functional outcomes and success measures” section.

For the past three years under current Governor Graeme Wheeler the ‘success measures’ part of this section has been led off with this statement: “Reserve Bank forecasts of annual CPI inflation should be comfortably within the target range in the second half of the forecast horizon, and near the 2% target midpoint.”

In the new corporate intent statement, however, that paragraph is gone, replaced with this seemingly far softer ‘success measure’: “The Bank implements monetary policy in a manner that can reasonably be expected to see CPI inflation outcomes between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.”

The RBNZ has appeared increasingly defensive about its inability to meet its inflation targeting in recent times. Asked at a recent press conference by interest.co.nz’s Bernard Hickey about failing now for six years to meet the 2% ‘midpoint’ inflation target, assistant governor John McDermott remarked (about 26:30 into recording) that the questioner’s “time-frame is very short”. The RBNZ was a flexible inflation targeter with more to think about than just the CPI. The goal was get to the target over time so that you protect the real economy and don’t create imbalances.

Over time the inflation rate had averaged just over 2% and in the “long span of history” the RBNZ was doing its job.

Appears perplexed

In recent times, however, the RBNZ has been putting out a lot of research work on inflation and the drivers of it. The bank has appeared clearly perplexed as to why past drivers of inflation have not kicked in during this current economic cycle.

And in the latest statement of corporate intent, the RBNZ has in its list of priorities for the 2016-19 put at number 1: “Continue to deepen our understanding of the current drivers of low inflation and their consequences for the economy and monetary policy.”

This priority did not appear in the list of priorities that the bank included in last year’s statement of corporate intent.

The RBNZ says that a protracted, very subdued economic recovery in the aftermath of the global financial crisis has led to significant falls in international commodity prices, and central banks around the world are grappling with a low inflation environment, despite unprecedented monetary stimulus.

“The Bank will undertake work to better understand the international and domestic drivers of inflation and the implications for monetary policy, and to ensure there is wide understanding of the Bank’s policy choices.”