The Reserve Bank of New Zealand thinks monetary policy may be more effective against housing market booms in future.In notes for a presentation to a Credit Suisse Asian Investor Conference on Thursday, Deputy Governor Grant Spencer said that prior to the
The Reserve Bank of New Zealand thinks monetary policy may be more effective against housing market booms in future.
In notes for a presentation to a Credit Suisse Asian Investor Conference on Thursday, Deputy Governor Grant Spencer said that prior to the global financial crisis, New Zealand monetary policy had issues trying to lean against the housing boom.
Policy was tightened considerably more in New Zealand than overseas because borrowers "slid out the yield curve" to take advantage of fixed rates influenced by low international rates.
New Zealand's relatively high short-term interest rates pushed up the New Zealand dollar due to so-called "carry-trade" activity.
Monetary policy should have a sharper impact in the post-crisis financial and economic environment, Mr Spencer said, citing four factors.
First, a higher cost of funds for the banks was putting pressure on lending rates for any given official cash rate level.
Secondly, borrowers were more conservative about taking on debt and their expectation of capital gains from investment in property were reduced.
Thirdly, New Zealand now had a positive interest rate, or yield, curve like other countries. Rates for longer term loans were higher than for short-term loans.
"This means that borrowers are increasingly moving to floating rates or short-term fixed rates, which will be quickly affected when monetary policy is tightened.
"Borrowers will no longer be able to 'slide out the yield curve' to avoid the impact of a policy tightening," he said.
Finally, the Reserve Bank's new prudential liquidity policy would have an impact.
The Core Funding Ratio requires banks to obtain a minimum proportion of their funding from stable, or "core", sources, namely customer deposits or debt instruments over one year to maturity.
"The Reserve Bank expects that in future boom periods, when global credit conditions are easy and domestic credit is growing rapidly, this Core Funding Ratio will act to push up the cost of funds and moderate the credit cycle, thus tending to reinforce the effect of monetary policy adjustments," he said.
The Core Funding Ratio would be a useful "macro-prudential" policy tool, even if it remained at a fixed level.
The Reserve Bank was investigating other potential macro-prudential policy tools, in particular some of the proposals coming out of the Basel Committee on Banking Supervision. It would adopt a cautious approach to such instruments.
"The prime purpose of any such instruments must be financial system stability -- the support of monetary policy is a secondary objective. We must also be wary of any measures that add significant costs to banking intermediation, thereby promoting alternative unregulated and less efficient financial channels."
