MNI INTERVIEW: RBNZ Should Hike Rates, Ex Chair Grimes Says

The reintroduction of limits on mortgage borrowing will have no effect on New Zealand's overheated housing market and the country's central bank should raise interest rates, former Reserve Bank of New Zealand chairman Arthur Grimes told MNI, adding that he expected his advice to be ignored.

Grimes, RBNZ chairman from 2003 to 2013 after previously serving as chief economist, said in an interview that the current cash rate of 0.25% was pumping up property.

"In a low interest rate environment with a lack of returns from other investments, the main impact of the low rates is to drive house prices, and that is an increasing risk to financial stability," he said.

"The low rates don't have much effect on business, they couldn't care less if they borrow at 1% or 3%, it doesn't make a big difference to them."

LENDING RESTRICTIONS

Grimes warned on house prices last year in an interview with MNI, shortly before the government issued an open letter to the RBNZ expressing concern over the issue

He told MNI that while he doubted the RBNZ would raise rates, he "hoped they don't exacerbate what they have done" and cut them further.

This week, the RBNZ said it would reintroduce lending restrictions suspended at the beginning of the Covid-19 pandemic, citing "speculative" borrowing. Loan-to-value ratios exceeding 80% will be limited to a maximum 20% of new owner-occupier mortgages from March 1. Grimes dismissed the move as immaterial.

"People just get around LVRs by borrowing from their parents' equity," Grimes said, "I doubt that move by the RBNZ will do anything."