Serviceability Restrictions as a Potential Macroprudential Tool in New Zealand - Submission
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Summary
We generally support the introduction of macroprudential tools to protect the financial stability of our banking system, particularly in the face of rising asset prices, as New Zealand has been experiencing.
We believe macroprudential tools should be used to support and supplement the Official Cash Rate (OCR) to jointly target inflation and financial stability. We see the separate pursuit of those targets as artificial and not that helpful. This view is supported by international comment that sees the policy rate and financial stability as interconnected, not separate1. Since the Global Financial Crisis (GFC), benchmark interest rates appear to be a tool of limited effectiveness in the face of systematically low inflation around the world - we see any tools in addition to the OCR as being helpful for balancing outcomes, particularly when rising asset prices are putting pressure on decisions between financial stability and growth in the rest of the economy, particularly the productive tradable sector.
We understand that the use of macroprudential interventions present challenges to the central bank, however others have been successful, as is pointed out in examples within the discussion document, and there should be no reason for such success not to be repeated in New Zealand.
We have previously supported the RBNZ’s introduction of Loan-to-Value Restrictions and agree with the Bank’s evidence that these have been helpful both in increasing the quality of loans and somewhat dampening house price inflation since their introduction, therefore contributing to improved financial stability.
We agree, however, that their effectiveness may fall over time and that they only target one part of the equation; hence the need for DTI limits in addition.
Should the DTI tool be developed, it should be well-used and not simply built and left on the shelf, just in case. Despite the current apparent easing of house price inflation, this may only be temporary and we see such restrictions as potentially acting as a more long-term limit on excessive and potentially risky lending into existing assets.
Excessive asset price inflation and higher lending that requires more tight monetary policy directly effects the tradable sector, through an overvalued exchange rate. We also believe the introduction of additional tools, such as the previous LVR and the potenial DTIs, can vitally give the RBNZ more room to act on other critical elements effecting our economy’s growth, most notably, the exchange rate.
The exchange rate remains at levels higher than Reserve Bank forecasts and acts as a factor weakening tradable growth and inflation - we believe this needs more consideration in future decisions.
Over the last four years, we have heard numerous times from the RBNZ about the dampening effect our relativelyhigh exchange rate has been having on tradable inflation and the ability for this part of our economy to grow.
In the August OCR announcment, Governor Wheeler said, “The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar. A lower New Zealand dollar is needed to increase tradable inflation and help deliver more balanced growth.”
In addition to the financial stability risk that recent house price inflation is posing, the price increases are increasingly putting pressure on wages and the ability to get staff. It is becoming harder and harder for staff to afford to live in areas close to where they work, particularly in the Auckland area. This threatens to exasperate existing skill shortages and add additional wage pressure.