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Summary
- RBNZ stressed that there was a need for stimulatory monetary settings to meet its inflation and employment targets.
- Plummeting prices, deflation and disruption of labour markets are some of the challenges that the world is facing.
- Easy monetary policies have been partly a cause of rising house prices and share prices that are a significant risk to economies.
RBNZ has stayed in a strong spot to continue to achieve its goal in the midst of COVID-19-induced economic jolt.
On 4 March, Adrian Orr, RBNZ Governor, delivered a speech at New Zealand Economics Forum, where he emphasised recent months had revealed again that monetary and fiscal policies worked in close association to cope with challenging periods.
Global bond yields have been increasing amid the rising optimism on the economic outlook, suggesting increased private sector confidence and improved economic growth projections. Higher bond yields can directly affect the funding costs for banks, implying higher lending rate.
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Nonetheless, Orr stated that central banks worldwide were ready to risk higher inflation targets as decreasing prices, deflation, and labour market disturbances are some greater challenges that the world was facing.
RBNZ kept its official cash rate unchanged in its latest policy meeting and stated that policy settings would be maintained for a long period.
Orr stressed on the need for stimulatory monetary conditions to fulfil its targets, adding that transformation must continue to stay viable and effective in resolving difficulties, which might come up in the long term.
In an environment where bond yields have been rising, Orr stated that tightened financial conditions to unhelpful levels would require alterations in policy settings, which it was ready for. He also noted that in a highly uncertain environment, inflation, and employment targets were expected to stay below RBNZ’s targets in the medium term, in the absence of sustained monetary stimulus.
RBNZ’s stand on considering house price sustainability
Orr stated that soaring house prices and spike in share prices can pose some of the greatest risks to economies. People took advantage of central banks easy monetary policies across the world, which contributed to a surge in stock markets and dramatic increases in house prices amid low interest rates, as per him.
NZ Government had asked RBNZ to consider uncontrolled house prices while setting its monetary and financial policies. Orr responded to this by affirming to work with the private sector, policy, and other non-government organisations to understand how the bank can help in supporting sustainable house prices.
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He stated that this aim was in line with RBNZ's financial stability plan, which called for the implementation of a sound and effective financial structure in order to prevent excessive financial risk. The housing market's multilayered presence requires a multifaceted response.
The central bank has always looked at the house prices while considering the condition of the financial system and would be able to play only a small part in comforting the housing market.
RBNZ also stated that the Monetary policy committee’s remit stayed unaffected. The focus of the bank would remain to preserve low and stable consumer price inflation and adding to maximum sustainable employment.
With the NZ economy recovering and the housing market showing resilience, some analysts believe the RBNZ can begin to tighten the policy in 2022.
