Policy puts central bank’s independence at risk, economist says

INDEPENDENT economist Cameron Bagrie says the Government has ‘‘gone too far’’ with its Reserve Bank policy changes and risks undermining the bank’s independence.

Finance Minister Grant Robertson yesterday announced changes to the bank’s Monetary Policy Committee’s remit requiring it to take into account government policy relating to more sustainable house prices, while working towards its objectives.

Mr Bagrie said he was not opposed to house prices being considered in the remit, but the inclusion of the term ‘‘government policy’’ was a concern.

Yesterday, Mr Bagrie said the new clause in the bank’s remit required it to ‘‘assess the effect of its monetary policy decisions on the Government’s policy’’.

‘‘The bank will have to take account of the Government’s objective to support more sustainable house prices,’’ he said.

‘‘This use of terms Government policy/objectives goes too far.’’

House prices used to be a consideration in the remit, Mr Bagrie said.

‘‘Why didn’t they just reinsert that?

‘‘What they’ve reinserted is a phrase that risks encroaching on the independence of the Reserve Bank.’’

Mr Robertson denied the changes politicised the remit.

‘‘It doesn’t, because the point of the remit is to give the Reserve Bank an opportunity to understand the Government’s policy,’’ he said.

Any effect on house prices would depend ‘‘entirely on the way the Reserve Bank makes their decision in the future’’.

Yesterday’s announcement follows a letter Mr Robertson wrote to Reserve Bank governor Adrian Orr in November suggesting a change to the rules, to take heed of the impact of any monetary policy on house prices.

The bank already considers risks concerning residential housing debt when it assesses the nation’s financial stability.

A direction has been issued (under section 68B of the Reserve Bank Act) to the bank requiring it to have regard to government policy on housing in relation to its financial policy functions.

The remit now says the bank will need to ‘‘assess the effect of its monetary policy decisions on the Government’s policy set out in subclause 3’’.

Subclause 3 says ‘‘the Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for firsthome buyers’’.

Mr Orr said the bank welcomed the new direction.

‘‘The minister’s direction is in tune with our recent advice to the Government in which we detailed the many influences on house prices, including the actions of the Reserve Bank,’’ Mr Orr said.

He said the adjustments would increase the focus on understanding and communicating the impact of the bank’s decisions on house price sustainability.

The bank’s objectives remain the same: maintain price stability, support full employment and promote a sound and stable financial system.

‘‘It’s a fine line,’’ Mr Bagrie said.

‘‘You’ve only got to look at the result; financial conditions have tightened in the past 24 hours, which is not in the spirit of what the Reserve Bank was trying to achieve.’’

The New Zealand dollar rose about one third of a US cent to 74.55c, its highest level since August 2017; bond yields and swap rates also rose.

On Wednesday, the Reserve Bank left the official cash rate on hold at a record low of 0.25% and warned monetary policy stimulus would be required for some time.

Its monetary policy statement was widely interpreted as an attempt to push back against overly exuberant market anticipation that the economy was recovering and rates would rise.

Mr Robertson said yesterday’s announcement was ‘‘the first step’’ as the Government considered broader advice about how to cool the housing market.

‘‘We know the rapid increases we have seen in recent months are not sustainable . . . many firsthome buyers are struggling to access the market,’’ he said.

‘‘We’ll be making further announcements in the coming weeks on other policy responses.’’ — The New Zealand Herald

❛ Financial conditions have tightened in the past 24 hours, which is not in the spirit of what the Reserve Bank was trying to achieve