Finance Minister Grant Robertson’s proposal to make the Reserve Bank (RBNZ) consider the impact its monetary policy has on house prices is reducing the likelihood of a negative Official Cash Rate (OCR) in 2021, according to financial markets.
The New Zealand dollar, two-year swap rates and the OIS (overnight indexed swaps) market jumped when Robertson announced he’d written to RBNZ Governor Adrian Orr on Tuesday.
These fell back slightly after Orr responded by defending the actions the RBNZ had taken to reduce interest rates and highlighting the role higher houses prices had played it helping it try to meet its employment and inflation targets.
ANZ strategist David Croy still characterised the market response as “significant”, with the market pricing out a negative OCR in 2021.
Economists less reactionary
While the economists interest.co.nz spoke to acknowledged changing the Monetary Policy Committee’s (MPC) remit to require it to “avoid unnecessary instability” in house prices would make it more difficult for the RBNZ to loosen monetary policy, none revised their official OCR outlooks.
They already did so on November 11, following the release of the MPC’s Monetary Policy Statement.
Bank economists were, a fortnight ago, basically all of the view the economy was performing well enough that cutting the OCR aggressively into negative territory in the first half of 2021 was unnecessary. ASB and BNZ economists even forecast the OCR staying at 0.25%.
ANZ chief economist Sharon Zollner said changing the remit would have an effect at the “margins”, but the MPC’s overriding mandate was still to target inflation and employment.
BNZ senior economist Craig Ebert said a potential change to the remit was largely a matter of nuance. In other words, it would be a stretch to suggest this would see interest rates go one way or another.
“Because in the end, no matter what the remit is, there’s always judgement and discretion [by the RBNZ] that goes into the policy,” Ebert said.
He noted a requirement for the RBNZ to “monitor” asset prices when conducting monetary policy, in accordance with what was effectively the old, pre-2019 remit, didn’t stop Orr’s predecessor cutting the OCR at a time asset price inflation was also an issue.
RBNZ likely to tighten bank lending more
Ebert said the RBNZ could respond in a range of ways to house prices being included in its remit, including by using macro-prudential tools, like loan-to-value ratio (LVR) restrictions, to tighten back lending.
Sean Keane of Triple T Consulting said, in a note he wrote for Credit Suisse, it was likely the RBNZ would use these tools rather than tighten monetary policy.
“The new policy remit will inevitably deliver a tightening in financial conditions and it will reduce/remove the assumed wealth effect that the RBNZ had been using as part of its current policy stimulus,” Keane said.
“Given that the RBNZ remains a long way from both its employment and inflation mandates that will presumably mean that the Bank will have to seek additional forms of stimulus elsewhere as a consequence of this change.”
But the market reaction on a negative OCR may have been premature…
Contrary to the economists interest.co.nz spoke to, Keane concluded: “The revived threat of negative rates in 2021 may thus become more rather than less likely because of today's announcement, as the impact of any lowering of the OCR on the housing market can effectively be sterilised by macro-prudential policy whilst still having an influence on the level of the currency and on lending to other sectors.
“An alternative scenario – and one that would reduce the amount of heavy lifting that the RBNZ might have to do - is for the government to deliver an even larger fiscal stimulus.”
Robertson signals he’s happy to give the RBNZ debt-to-income tools
Coming back to macro-prudential tools, Cameron Bagrie of Bagrie Economics has been calling for Robertson to enable the RBNZ to restrict bank lending to borrowers seeking to take on high levels of debt compared to their income.
Before Robertson published his letter to Orr on Tuesday morning, interest.co.nz asked him whether he saw more urgency in enabling the RBNZ to use debt-to-income ratios.
Robertson said the process was for him to only consider giving the RBNZ this tool, should the Bank request it.
“There is a lot of heat in the housing market at the moment and the RBNZ looks very closely at the kinds of tools that it needs. And so, if it proposes that [for debt-to-income ratios to be added to its toolkit], it’s certainly something we’ll obviously listen to,” Robertson said.
“I’m open to conversations about the tools they have.”
Zollner believed debt-to-income restrictions were more political than LVRs because they tended to disproportionately affect first-home buyers.
Indeed, while the Bank of England’s debt-to-income cap is 4.5, with some flexibility for a portion of lending above that, the portion of mortgage lending to first-home buyers with debt more than five times their annual income rose to 43% in September, from 36% a year earlier.
Conditions on Funding for Lending?
Some of the economists interest.co.nz spoke to even suggested the RBNZ could change tack on its Funding for Lending Programme.
The RBNZ a fortnight ago confirmed it would make up to $28 billion of funding priced at the OCR available for banks to on-lend to whomever they wish; with the hope this would help them lower interest rates.
Bagrie questioned whether the RBNZ even needed to implement the programme.
Keane and Kiwibank chief economist Jarrod Kerr said the RBNZ could require banks to draw down on the scheme for non-housing loans.
Robertson back in August and the National Party last week said they wanted banks to be made to on-lend to productive parts of the economy.
Keane said Robertson’s proposal to change the MPC’s remit suggested credit allocation would “very much” become part of the RBNZ’s overall policy consideration. To date the RBNZ has said credit allocation isn’t its job.
Kerr was very supportive of this.