New Zealand tells central bank to consider housing in policy decisions

New Zealand will force its central bank to consider the effect on the housing market before making monetary policy decisions, as Jacinda Ardern tries to address criticism for failing to boost supply and affordability.

The contentious instruction, which some economists warned would undermine the Reserve Bank of New Zealand’s independence, was initially opposed by the bank and sent government bond yields higher.

But changes made to the remit of the RBNZ’s monetary policy committee will require it to take account of policies related to achieving more sustainable house prices, the government said on Thursday.

Grant Robertson, New Zealand’s finance minister, said the committee retained its autonomy but “the bank will have to take into account the government’s objective to support more sustainable house prices, including by dampening investor demand”.

The intervention caused the New Zealand dollar to rise 0.2 per cent to 74.49 US cents, its highest level since August 2017, as investors bet the RBNZ would tighten monetary policy sooner than forecast. Yields on 10-year New Zealand government bonds hit the highest point since May 2019. Bond prices fall when yields rise.

The decision did not change the objectives or mandate of the RBNZ, which are to maintain price stability, support full employment and promote a sound and stable financial system.

However, some economists expressed concern over the government’s intervention.

“The use of the phases ‘government policy’ and ‘government objectives’ in relation to house prices risk encroaching on the independence of the RBNZ,” said Cameron Bagrie, founder of Bagrie Economics, a research firm.

“They should have just said house prices should be a consideration, an explicit mention of what already happens. I think linking it to government policy/objectives goes too far.”

Rabobank warned there was a risk the instruction would force interest rates to rise, even though parts of the New Zealand economy were struggling. This would underline how inefficient the central rates tool was when trying to target activity across different sectors in a globalised economy, the bank said in a note.

The RBNZ said it welcomed the direction issued by the government, noting that its monetary policy committee targets remained unchanged.

But Adrian Orr, governor of the central bank, said last year that housing was already considered by the bank when making decisions and fiscal policy was best placed to tackle housing demand when the changes were first mooted by the government.

Ardern was re-elected by a landslide last October, but critics said she has failed to deliver on promises to tackle a housing crisis. Prices rose 19.3 per cent in the year to the end of January.

Sharon Zollner, chief economist at ANZ New Zealand, said the government and RBNZ looked to have found some “middle ground” that could resolve the stand-off over the best way to confront house price inflation.

But she added there were no easy answers to boosting the economy and raising inflation expectations while tackling surging house prices. 

“The tension between monetary policy objectives and financial stability objectives at the moment is the most extreme I’ve seen it,” she said.

The government has agreed to consider a request by the RBNZ to introduce debt-to-income ratio limits on lending — a tool Wellington had previously rejected over concerns it would make it difficult for first-time buyers to get on the housing ladder.

Grant Duncan, associate professor of politics at Massey University, said both the government and the central bank were trying to “pass the buck” on housing affordability.

“There is no doubt the RBNZ’s emergency measures to boost the economy are boosting house prices . . . but ultimately it’s a housing supply problem,” he said.