MNI INTERVIEW: RBNZ Playing "Long Game" Says Bascand

It is too early for the Reserve Bank of New Zealand to "take away the punchbowl" and it still has plenty of monetary policy ammunition for more action if required, Deputy Governor Geoff Bascand told MNI, adding that continued sustained appreciation of the local dollar could undermine progress towards targets.

While the RBNZ is in no hurry to respond to a global bond market selloff, those calling for a more hawkish stance on interest rates are also "getting ahead of themselves," Bascand said in an interview on Tuesday.

"We are planning to stay the course with our policy, because we believe we will need to support the economy for some time," he said.

"If we raise interest rates to slow the housing market we'd be boosting unemployment, so I don't know what people who want higher rates are wishing for to be honest."

The RBNZ's official cash rate has been held at a record low of 0.25% since March last year, and the bank is undertaking NZD100 billion in quantitative easing via its Large-Scale Asset Purchases programme.

HOUSE PRICES

The NZ government has asked the RBNZ to factor in rising house prices – up almost 20% in a year – into its interest rates policy.

Bascand said the bank agreed with the government that house prices were an issue. The RBNZ reintroduced loan-to-value restrictions on mortgages this week to curb riskier lending, and Bascand noted that until recently rising house prices had been a source of confidence bolstering recovery.

Referring to the jump in global bond yields, Bascand said the RBNZ was "watching them closely", but that to increase the rate of asset purchases would be a knee-jerk response.

Achieving targets on inflation and full employment will be a slow process, requiring ongoing policy commitment, he said.

"If anyone thinks we haven't got any more ammunition at our disposal they couldn't be more wrong," he said.

"We could buy more bonds, and we have other tools for more stimulus such as lower or negative interest rates if we need to.

"This is a long game and the recovery is uncertain. It's easy to see the good things but there are still risks and we just saw some of them on bond markets."

Referring to the local dollar, which has increased from as low as US56 cents last March to over US74 cents last week, Bascand said that while the NZ export sector was still performing well, along with the terms of trade, more appreciation would be unwelcome.

"If the NZD keeps moving in a sustained way it would be challenging in terms of our objectives, because it would dampen inflation," he said.

Any RBNZ move to influence the currency, however, would only occur if the bank saw it undermining the momentum towards inflation and employment targets.