MNI INTERVIEW:Dollar To Keep RBNZ Policy Loose During Recovery

Concerns over strengthening its currency are likely to keep the Reserve Bank of New Zealand's policy settings loose for some time even as the economy recovers, former RBNZ Assistant Governor Grant Spencer told MNI.

The RBNZ is constrained by the central banks of larger economies taking longer to recover than New Zealand's, Spencer, who left the RBNZ in 2018 after 11 years, told MNI in an interview.

"I would see few grounds for further easing by the RBNZ, and fundamentally there are reasons to start to give signals to come out of that because our economy is strong," said Spencer, now an Adjunct Professor at the School of Economics and Finance at the Victoria University of Wellington.

"But the global situation does constrain a small country and a central bank like the RBNZ because of a fear of pushing the currency up," he said, "That puts a brake on us coming out of our easing policy, because we need to wait for the big players to lead the way, and they don't seem eager to do that in a hurry."

NO NEGATIVE RATES

Official interest rates, currently at a record low 0.25%, were unlikely to breach negative territory as the RBNZ has suggested is possible, he said, adding that current policy settings are likely to be on hold for some time.

"I think that last year the Governor (Adrian Orr) was considering it seriously, and he was keen to give it a try but I think there are mixed views on the Monetary Policy Committee about its efficacy and the its potential for creating other distortions in the banking system," said Spencer, who added that the RBNZ was "almost running out of ammo" for easier policy anyway.

Only if a global bond market sell-off pushed commercial interest rates higher would the RBNZ be likely to cut rates further, and then only to the 0.10% level reached by the Reserve Bank of Australia, he said.

The RBNZ is unlikely to extend its NZD100 billion bond-buying programme into next year, Spencer said, given that lower-than-expected government borrowing would endanger the central bank's self-imposed ceiling of not owning more than 60% of the outstanding stock of public debt.

While the government has told the RBNZ to take house prices into account in its monetary policy decisions, after prices surged 20% over the last year, Spencer said monetary policy was limited in what it could do.

Macro-prudential tools, such as setting loan-to-value ratios for borrowers, are more appropriate for limiting house price gains, he said, adding that the government had more power to influence the property market through regulation and taxation measures, such as capital gains taxes.