Northland Property Investors' Association

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21-09-2012

RBNZ targets house prices

Landlords.co.nz

The new Reserve Bank Governor must increase the OCR if house prices rise rapidly, even if inflation is on target.

Finance Minister Bill English and RBNZ Governor-Designate Graeme Wheeler signed a new Policy Targets Agreement (PTA) yesterday. The Reserve Bank Act states that the Governor is accountable for maintaining price stability.

Westpac chief economist Dominick Stephens said there had been a couple of quite significant changes compared to the PTAs that prevailed under Alan Bollard.

“In our judgement, the balance of these changes amounts to a “tightening” of the definition of price stability. This is a real break from previous PTA renegotiations, which have tended to loosen the definition of price stability and give the Governor more latitude.”

He said this would lead to higher interest rates. “The RBNZ will have to pay more attention to rising house prices, and the tighter inflation target [of 2%] will be tougher to hit when the Canterbury rebuild reaches full swing. In the long run, this should help keep average interest rates lower over a full economic cycle, because inflation expectations may be anchored at a lower level.”

Under the last PTA, Bollard was tasked with keeping inflation between 1% and 3% on average.  In the early part of his tenure, Bollard often let it rise towards 3%.

Wheeler won’t have that option – he will be required to focus on 2%.

Stephens said:  “Graeme Wheeler commented that this will better anchor inflation expectations, and we tend to agree.”

A key change that will affect property investors is that he will have to monitor asset prices.

The RBNZ will be required to increase rates if there is a housing boom and drop them if prices fall.

Stephens said: “Were this PTA in place last decade, the RBNZ would have been able to hike interest rates earlier in response to the house price boom, which we think would have produced better results.”

He said Westpac supported the changes.

“The experience of last decade taught us that asset price cycles can be dangerous and central banks should combat them early. We also support the extra focus on the middle of the Reserve Bank’s numerical inflation target. In the past, both actual inflation and inflation expectations have tended to drift towards the top of the Reserve Bank’s target range, rendering the lower part of the band redundant. In effect, the new PTA has reduced the speed limit for inflation from 3% to 2%. The long-run result will be lower interest rates over the course of the economic cycle, due to lower inflation expectations.”

Tags: ocr - bill english - graeme wheeler - dominick stephens

Source: Landlords.co.nz

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