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RBNZ Says Higher Rates Wrong Policy to Tackle Housing Boom

Reserve Bank of New Zealand Deputy Governor Grant Spencer. Photographer: Mark Coote/Bloomberg
Reserve Bank of New Zealand Deputy Governor Grant Spencer. Photographer: Mark Coote/Bloomberg

New Zealand’s central bank said it isn’t appropriate to raise interest rates at the moment and it is “seriously considering” using other tools to curb a housing-market boom.

“We at the Reserve Bank see the current overheated housing market as a real threat to future financial stability,” Deputy Governor Grant Spencer said in a speech in Wellington today. “Higher interest rates are not the right policy response at this time” and the central bank “is therefore seriously considering the use of macro-prudential policy,” he said.

The RBNZ is reluctant to raise its Official Cash Rate from a record-low 2.5 percent because that could boost a currency it has described as over-valued. Since peaking at above 86 U.S. cents on April 11, the New Zealand dollar has dropped more than 10 percent against the greenback amid signs of an improving U.S. economy and after limited intervention by the central bank.

Policy makers are “well aware that any official cash rate increases at this time would likely put unwanted pressure on the exchange rate,” Spencer said.

The New Zealand dollar traded 0.4 percent higher at 78.20 U.S. cents as of 3:30 p.m. in Wellington after a report showed business confidence rose in June to the highest since February 2010.

Rate Outlook

Spencer’s views echo RBNZ Governor Graeme Wheeler, who said June 13 he didn’t expect to raise borrowing costs this year. The bank’s forecasts released the same day signaled no change in rates until the second half of 2014.

“From what the bank’s emphasizing, it gives the impression they don’t want to touch the OCR for as long as they can,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington, who predicts the RBNZ will be forced to raise rates in March next year. “For us it’s more of a macro picture. We think the risks of them making a mistake here are rising.”

New Zealand’s dollar has declined since Wheeler on May 8 said he was intervening to weaken it. He bought a net NZ$90 million ($70 million) in May after selling NZ$256 million in April, according to RBNZ data published today.

Wheeler and Finance Minister Bill English last month agreed on the use of a number of measures to curb home lending, including limits on the number of loans banks can make at more than 80 percent of a property’s value.

Prime Minister John Key said this month he wants the central bank to exempt first-home buyers from the tighter lending criteria.

“Our preference is to keep the policy simple and effective by not having major exemptions and by minimizing the possibilities for avoidance,” Spencer said today.

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