Questions over future RBNZ policy

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Future Reserve Bank policy targets – and their wider impact - is the topic on many lips following the announcement the bank’s governor will step down later this year.

Wednesday, February 8th 2017, 10:33AM 2 Comments

by Miriam Bell

Reserve Bank governor Graeme Wheeler announced yesterday that he will not be serving a second term when his current one ends on September 26.

The current assistant governor, Grant Spencer, will serve as acting governor for six months after Wheeler’s term ends.

There will be no change to the Reserve Bank’s Policy Targets Agreement (PTA) for the period Spencer is acting governor.

Westpac acting chief economist Michael Gordon said Spencer’s appointment avoids any potential difficulties around making an appointment so close to the general election on September 23.

But while the announcement clears up one source of uncertainty for monetary policy, another one still remains, he said.

“The election is shaping up to be a close one… If power were to change hands in September, the new government might want to stamp its mark on monetary policy.

“The PTA now won’t have to be negotiated until next March, but it will have to be addressed eventually.”

Given Spencer has said he intends to retire after his term as acting governor that will mean two new appointments to the two top jobs at the Reserve Bank.

This could have an impact on the Reserve Bank’s approach to a range of policies.

Gordon said Spencer has been the driving force behind the development of the Reserve Bank’s macro-prudential policies like loan-to-value ratio (LVR) limits.

“A new appointment, particularly an outside appointment, could well bring a different philosophical approach to this somewhat controversial branch of policy.”

The Reserve Bank’s LVR rules – and desire to add debt-to-income ratios to their toolkit – have not been popular with some commentators.

Property Institute chief executive Ashley Church said Wheeler’s departure provided the Government with a timely opportunity to review the LVRs and their effect on the housing market, particularly in Auckland.

In his view, many of the Reserve Bank’s decisions have damaged the market and slowed down the rate of construction of new homes which might otherwise have caught up with demand.

“The Reserve Bank has been unashamedly at odds with the market in its attempt to artificially cool demand. Sadly, it’s failed, and has only served to make the problems in Auckland even worse.”

The Government should add a “Housing Market Supply” clause to its contract with the Reserve Bank which would require the Bank to consider the effect its policies would have on overall supply, Church said.

“If such a policy had been in place two years ago the disastrous LVR restrictions would have been much more carefully considered and there would be no talk of debt-to-income limits on lending”.

Finance commentator Michael Reddell questioned whether allowing the existing PTA to ride while Spencer was acting governor was in the spirit of the relevant legislation.

He said it highlights the desirability of a more thorough review of the governance provisions of the Reserve Bank Act.

A review would be an opportunity for some sensible revisions to the Act – taking into account such factors as changes in the role of the Bank and changes in the understanding of how mechanically monetary policy can be run and monitored.

Read more:

Reserve Bank governor not seeking another term.

Risks in new RBNZ proposal.

Tags: LVR Macro Prudential Tools RBNZ Reserve Bank

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