MNI INTERVIEW: Rates Above 2% "Restrictive"- RBNZ's Bascand

The Reserve Bank of New Zealand sees neutral interest rates at "around 2%" and monetary policy will have a restrictive impact on the economy when the bank raises them above this level late next year on current projections, according to outgoing RBNZ Deputy Governor Geoff Bascand.

Speaking with MNI in an interview on Monday, Bascand said that while there was "a good deal of uncertainty" about the precise level for neutral rates, the central bank's "best guess is around 2%." The October meeting was his last as an attendee.

Lat week, the RBNZ raised its Official Cash Rate (OCR) by 25 basis points to 0.75% and released a projected track which had the OCR at 2.1% by December 2022 and 2.5% by September, a level at which rates would have switched from accommodative too restrictive, see: MNI STATE OF PLAY: RBNZ To Hike In 25bps Increments-Governor.

LIVE MONETARY POLICY MEETINGS

Bascand added the caveat that last week's Monetary Policy Statement (MPS) was published before the emergence of the Omicron virus variant, which potentially introduced new uncertainty in the global outlook.

He said every meeting of the RBNZ's Monetary Policy Committee was a "live" meeting at which an interest rate decision could be made, and the bank was not tied to changing the OCR only at meetings which coincided with the release of the quarterly MPS.

Bascand said the RBNZ had pondered a higher 50bps increase last week but believed that a 25bps rise in concert with forward guidance on the path forward gave the market a clear view of the bank's outlook.

"The market is already doing some of this for us," he said. "Wholesale rates have gone up and some mortgage rates have gone up by close to 200bps."

UNWIND GOVERNMENT BOND HOLDINGS

Bascand said the plan to unwind the central bank's holding of government bonds, with details to be announced early next year, would be another way to reduce stimulus although it would be a "relatively small change" in the policy mix.

The RBNZ, which also has macro-prudential responsibilities, has moved to dampen the booming property market recently by re-introducing Loan to Value Restrictions (LVR's) for borrowers, and last week asked for industry feedback on debt servicing restrictions.

Bascand said there was a "full line of sight" between the Monetary Policy Committee (MPC) and the Financial Stability Committee, with the MPC receiving advice on stability.

"There is an intersection in the way they operate together, but while there is communication the MPC doesn't make decisions on LVRs," he said.