Reserve Bank swats away house price questions ahead of new move to lower borrowing costs

The Reserve Bank has batted away questions about whether it is stoking a red-hot housing market as it announced a new $28 billion programme aimed at forcing down borrowing costs.

On Wednesday afternoon the central bank left the official cash rate (OCR) at the record low 0.25 per cent and signalled details of its new funding for lending programme would be coming next month.

Both measures were expected, but hours earlier the bank announced it would soon begin consultations about whether to reimpose loan to value ratio restrictions (LVRs) in a bid to curb risky lending in the residential property market.

Governor Adrian Orr said the bank had seen a “marked acceleration in higher risk loans, particularly to investors in the property market”.

The new restrictions will not be in place until at least March although Orr said banks could take steps to prepare for them, claiming most of the chief executives of New Zealand banks had asked for the limits to be brought back in.

But Orr refused to make comments about the state of the property market, where house prices are showing signs of strong increases amid record low interest rates, even with the economy stalling and migration levels plunging due to Covid-19.

The funding for lending programme, which will see the Reserve Bank lend directly to qualifying banks at near the OCR, is designed to lower borrowing costs across the economy although assistant Governor Christian Hawkesby conceded business lending demand was subdued.

Banks will be offered funding equivalent to up to 4 per cent of their loan books initially, but could be offered up to another 2 per cent if they demonstrate an increase in lending. Orr would not be drawn on how much the scheme could lower borrowing costs, other than saying he hoped it would be significant.

Asked about the possible impact of the scheme on the housing market, Orr repeatedly said this was not the Reserve Bank’s concern, complaining at one point that journalists were writing far more about house prices than about employment, one of the Reserve Bank’s targets.

“It’s really important to understand that we are doing what we are doing today, and always, forthe purpose of the Reserve Bank’s mandate and operating within its remit,” Orr said, pointing to a target of keeping inflation at 1-3 per cent and supporting maximum sustainable employment.

Asked if there was a point at which house prices became a financial stability concern, Orr said the bank was focused only on high risk lending where households could be vulnerable to a small change in interest rates or household income.

“That is our concern, not house prices.”

The Reserve Bank’s forecasts showed the economy was in far better shape than at the time of the last monetary policy statement in August, with asset prices, employment and household spending better than expected.

But the forecasts indicated that the New Zealand economy may now be entering a second recession, with forecasts for economic activity to shrink slightly in the final three months of 2020 and the first quarter of 2021, before resuming modest growth.

Reserve Bank chief economist Yuong Ha said after bouncing back after lockdown, the economy was now seeing a number of spending measures end.

“The broad picture is one where the economy is in a slightly better starting point, it’s still a big hole that we’re climbing out of and it will take a while for the economy to recover, underpinned by incredibly stimulatory fiscal policy and monetary policy.”

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