RBNZ constrained in influencing long-term rates, Wheeler says
The Reserve Bank's influence over long-term interest rates is limited by global investor activity, and it may need to call on further macro-prudential tools to assist with policy, according to governor Graeme Wheeler.
New Zealand's central bank hiked the official cash rate 100 basis points to 3.5 percent earlier this year, and is currently assessing the impact of those hikes, but that has had little impact on longer-term mortgage rates, which have followed long-term rates in major economies lower, Wheeler said in a speech in Wellington today.
While the yield on New Zealand's 90-day bank bill rate has climbed to 3.7 percent from 2.91 percent at the start of the year, the yield on the 10-year bond has dropped to 3.93 percent from 4.76 percent over the same period.
Wheeler said "long-term interest rates are highly correlated across countries" making it difficult for central banks operating with floating exchange rates to run independent monetary policies.
"They can influence short-term rates, but cannot set their own long-term rates," he said. "The Reserve Bank raised short-term rates during the period March to July 2014, but longer-term mortgage rates have fallen as a result of the decline in long rates in the major economies."
Wheeler delayed hiking interest rates last year, instead using macro-prudential tools to impose limits on low-equity home lending to quell demand in a heating property market for fear of stoking demand for the kiwi dollar, and the bank has been active in currency markets to try and push the kiwi down.
The bank is seeing "considerable appreciation" in asset prices such as fixed income securities, equities and real estate as a result of global investors seeking yield in a globally low interest rate environment, Wheeler said. "The central bank's limited influence on long-term interest rates means macro-prudential tools may need to be used "to help prevent asset price booms and complement monetary policy," though more work is needed to be done to explore the costs and benefits of such actions, he said.
"Particularly important in this regard will be considerations as to how best to coordinate monetary policy and macro-prudential policy decisions when economic and financial cycles are out of sync and the policies are not complementary," Wheeler said.
New Zealand first introduced inflation targeting 25 years ago, and Wheeler said the bank continues to hold the view that the most important contribution monetary policy can make is through pursuing price stability.
"Price stability preserves the purchasing power of the currency and enables producers and consumers to plan with greater certainty for longer periods, including by responding to relative price changes that would otherwise be obscured during times of high inflation," he said.
Wheeler reiterated that New Zealand's real effective exchange rate remains "unjustified and unsustainable" though said there was little the central bank can do to "sustainably alleviate" an overvalued rate, either through policy actions or adopting a different regime.
"Past policy attempts to give the exchange rate more weight in monetary policy decisions tended to generate more interest rate volatility, with little lasting effect on the real exchange rate," he said.