Recent Reserve Bank efforts to explain the "speed limits" on high loan-to-value lending appeared to reveal "substantial public surprise" about the central bank's forecasted future rises in interest rates, RBNZ Deputy Governor Geoff Bascand said today.
In a speech in Auckland about the RBNZ's communications policies and strategies, Bascand said that because the RBNZ might reach one audience effectively (in this instance financial markets) - this "does not guarantee we have reached another".
"A recent foray into the 'public audience' via an opinion article explaining the LVR policy, that repeated our monetary policy expectations [and referred to mortgages possibly hitting 7% to 8%], appeared to reveal substantial public surprise about our interest rate projections," Bascand said.
"While unintentional, it therefore possibly enhanced the projection’s impact.
"Achieving both accessibility and credibility, while simultaneously communicating with both the general public and financial markets, can sometimes create tensions."
He said the RBNZ was deeply committed to transparency and saw clear communication as vital to making its actions more effective.
"We are working to enhance the openness and effectiveness of our communications."
Central banks’ communication strategies and their ability to communicate effectively had been challenged enormously by the events and consequences of the Global Financial Crisis, the introduction of macro-prudential policy, the emergence of new technology and social media, and in New Zealand’s case by expanded regulatory responsibilities for insurance and the non-bank deposit-taking sector.
“Complexity has increased, audiences have expanded, and the immediacy and saturation of news coverage has turned the volume control on full,” Bascand said.
The Reserve Bank had adapted its communications to recognise significant interest shown in the Bank’s policy settings, policy objectives, tools, and governance.
A recent study reported that the Reserve Bank of New Zealand is the second most transparent central bank in the world, just behind the Swedish central bank.
Bascand said the new LVR limits had "required a fresh understanding and enhanced communication".
"New policy frameworks pose special challenges to build understanding of their efficacy, conditionality, and operation. Faced with rising house price inflation on top of seemingly already over-valued house prices, the Bank moved quickly to institute new policy measures."
The RBNZ had "set the scene" for these measures in a number of on-the-record speeches in advance, as well as remarks at press conferences, and in Monetary Policy Statements and OCR statements "about our concerns with easier lending standards and house price inflation".
Following the introduction of the LVR limits the RBNZ had carried out "sustained" communications about their operation, rationale and objectives in further speeches, media interviews, and the November Financial Stability Report.
'Significant commentary'
"The introduction of LVR restrictions has attracted significant commentary from many different quarters. Some analysts feel there has been a blurring of financial stability and monetary policy objectives. Others have questioned the Bank’s operational policy design, its distributional impacts, and the legitimacy or autonomy of its decision-making.
"Some have credited the Bank with policy innovation and the willingness to act before a crisis eventuates.
"We have reiterated that LVRs are targeted at the primary objective of financial stability, but that there is also a potential benefit for monetary policy if they reduce the spillover of house price inflation into stronger consumer demand and higher price inflation for goods and services."
Bascand said explaining important inter-dependencies with other policies – "our own or wider government ones" – was vital.
"It is well-known that monetary policy 'needs friends', as the saying goes, particularly supportive fiscal policies.
"Macro-financial (or macro-prudential) policies can also benefit from supportive micro-economic policies (e.g. productivity, housing, tax, regulation, etc) whereby these reduce risks and enhance the economy’s growth capacity and performance. In these circumstances, we endeavoured to support policies that promoted housing supply, as a goal, without commenting on specific policy proposals."
Transparency may work against financial stability
Talking of more general issues, Bascand said there may be occasions where complete transparency may work against the interests of financial stability, "for example if a problem at a bank precipitated a run before the bank and the authorities had a chance to correct or at least clarify the problem".
"There are strong grounds, therefore, for seeing financial stability communication in normal times as different from that applying during times of crisis."
Bascand said in the event of an institutional failure or rescue, the RBNZ decisions can be reviewed after the event.
"No rescue operation would be undertaken without wider public sector involvement, since taxpayer funds are at stake. Normal public sector accountability mechanisms (annual or ex-post reporting, audit, select committee examination, etc) operate in such a case.
"Transparency of the Bank’s financial stability activity is also limited by the requirement on us as a supervisor to maintain confidentiality of information that institutions provide to us. This means that, generally speaking, we cannot reveal the nature of discussions or correspondence with a supervised entity, both to protect commercial confidentiality and to ensure entities feel safe in talking with us."
Expanded responsibilities
Bascand also talked about the RBNZ's expanded regulatory responsibilities, in particular regulating nonbank financial deposit takers (NBDTs) and licensing and supervising insurance companies.
"The Bank’s stakeholder engagement has changed significantly, whilst expectations upon it and its public persona as a guardian of financial soundness and efficiency have been magnified considerably."
In terms of expanded regulatory responsibilities, the communication challenges to date had been more stakeholder management related (understanding the regimes’ operation and building trust in our regulatory relationship) rather than widespread public discourse. Taking on additional regulatory responsibility for insurers and non-bank-deposit takers meant dealing with everyone from bank chief executives to building societies to small mutual insurers.
"These regulatory responsibilities were assigned to the bank out of a concern to avoid financial failings, such as we saw with finance companies and in the insurance sector.
"The challenge here is that public expectations may well be at odds with regulatory and supervisory responsibilities and realities.
"We have communicated that we do not operate a no-failure regime, as well as explaining our responsibilities vis a vis the Minister of Finance and other institutions such as the Financial Markets Authority.
This isn't a 'no failure' regime
"I suspect we have many communication challenges ahead to reach public understanding that the Reserve Bank’s regulatory and supervisory oversight does not represent a ‘no failure’ regime, and that there are no guarantees that insolvencies and other forms of business failure will not occur. This extension in regulatory and supervisory responsibilities will demand new channels, new audiences and new messages."
Bascand indicated that the RBNZ was introducing "a regular stakeholder survey", though didn't give an indication of when.
"The Swedish central bank (Riksbank) has a long history of conducting a two-yearly stakeholder survey and we can benefit from following their practice.
"The survey will help us understand whether we are sufficiently clear in our communications, and the level of credibility attached to them. It will also help us assess whether we prioritise the right communication channels. A key benefit will be the constructive broadening of our audiences, as stakeholder analysis will require us to gear our communications to a multiplicity of stakeholders."
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