RBNZ targets house prices

Finance Minister Bill English and RBNZ Governor-Designate Graeme Wheeler signed a new Policy Targets Agreement (PTA) yesterday. The Reserve Bank Act states that the Governor is accountable for maintaining price stability.

Westpac chief economist Dominick Stephens said there had been a couple of quite significant changes compared to the PTAs that prevailed under Alan Bollard.

“In our judgement, the balance of these changes amounts to a “tightening” of the definition of price stability. This is a real break from previous PTA renegotiations, which have tended to loosen the definition of price stability and give the Governor more latitude.”

He said this would lead to higher interest rates. “The RBNZ will have to pay more attention to rising house prices, and the tighter inflation target [of 2%] will be tougher to hit when the Canterbury rebuild reaches full swing. In the long run, this should help keep average interest rates lower over a full economic cycle, because inflation expectations may be anchored at a lower level.”