By Bernard Hickey
Prime Minister John Key has weighed into the debate over the Reserve Bank's proposal to toughen up capital requirements for rental property mortgages, saying it was a logical move for the Reserve Bank given inflation was falling well below the Reserve Bank's target and therefore the bank needed other tools.
Key also pointedly noted that inflation was below the Reserve Bank Governor Graeme Wheeler's policy targets agreement target of about 2% and may go lower than the current 0.8%, which kept downward pressure on interest rates.
"There might be some logic in that, but we'll have to see," Key said when asked directly about the Reserve Bank's proposal that banks classify rental property loans in a new sub category that would allow the regulator to specify higher capital levels at a later date. See more detail on the proposal here in Gareth Vaughan's article and in David Hargreaves' article.
Asked about rental property investor concerns that higher capital requirements would put up their interest costs and rents, Key said: "That's always the concern. It's one of the reasons I don't like capital gains taxes because in the end the incidence of those capital gains taxes are paid by those people renting properties, but in the end, the Reserve Bank has tried to expand the number of tools in its toolbox to ensure that it can keep interest rates lower for longer."
"Given where inflation is at, they certainly look like staying lower for quite a bit longer," he said.
"Given what it was doing around LVRs, it was trying to ensure that there's not a bubble emerging in the housing market and it can control where it sees the pressure points, and doing so in such a way that it's not having to overly increase interest rates," he said.
"In reality, given you've inflation at 0.8%, and potentially lower when new information comes out, then you've got a scenario where it's not an option for the bank to raise interest rates, so it does have to find other ways, potentially in that very benign inflation environment, to work out how it can control what it sees as pressure in the system."
Key points RBNZ to 2% inflation target
Asked if the Reserve Bank should now be cutting interest rates given inflation was below the bank's 1-3% target band, he said he did not know as it was a matter for Governor Graeme Wheeler.
"But the Act is quite clear. The bank has got to work to have inflation at its mid-point of two per cent, and it's 0.8 per cent (December quarter annual inflation), and all the signs I see is that potentially it goes lower than that," Key said.
"There doesn't appear to be any upward pressure on inflation, and generally if anything it looks like it's downward, and the Act is quite clear about what point they should be shooting for, which is 2 per cent," he said when pressed about whether the bank was undershooting its target.
"The Governor has the flexibility to ride things out a little bit, but overall there's a reason why the target is set at 2%. That's perceived to be the correct level of underlying inflation in New Zealand," he said.
Asked how long the Governor could be outside the band, Key said: "You'd obviously expect to cut them a bit of slack because they make their interest rate predictions and changes for inflation 18 months out. It's bit like turning around an oil tanker. It's not as simple for the Governor, in his defence."
(Updated with more details, quotes)
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