Aucklanders' and salary-earners' concerns about house prices relegated behind addressing inflation and unemployment
Two years ago, Finance Minister Grant Robertson very publicly (and somewhat contentiously) added a requirement to the Reserve Bank's remit to consider the Government objective on sustainable house prices in its decision-making.
"It is the job of the Government through the remit to be clear about what our expectations are of the bank, and so we do want them to consider what we believe at the moment are unsustainable house prices," he insisted at the time.
This week, he very quietly removed that requirement from the remit objectives.
Instead in the bank's charter (a secondary document) it's now required to "explain its assessment of the effects of its decision" on sustainable house prices. That's alluded to in the context to the remit.
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But the remit still requires the bank to return inflation to 1 to 3 percent, and to support maximum sustainable employment.
Previously, the 2021 remit's operational objectives required the monetary policy committee to assess the effect of its decisions on the Government’s policy to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
Announcing the new remit this week, Reserve Bank chair Neil Quigley made no mention of the Government's decision to remove house prices. "This largely represents a continuation of the current monetary policy regime, with some changes that support more clarity for the monetary policy objectives," he said.
And Robertson said only that the Reserve Bank would continue to assess the impact of its decisions on the Government's sustainable house price objective – he made no mention of its removal from the remit objectives.
In response to questions from Newsroom, he says: the new remit makes reference to sustainable house prices in the context section, "so it’s incorrect to say it has been removed".
"Sustainable house prices has never been an operational objective for the monetary policy committee," Robertson adds. "The Charter has been updated to include a new requirement for the monetary policy committee to explain the impacts of monetary policy on the Government’s objective of house price sustainability in each monetary policy statement, so the requirement overall has not been lessened in any way."
For its advice to the minister this year, the Reserve Bank surveyed the public on how worried they are about unemployment rising above 3.2 percent.
A third of respondents were very averse to high inflation, a third were very averse to high unemployment, and the remaining third thought other factors such as housing affordability or higher incomes were more important.
Young and low-income people had less tolerance for inflation; older people had less tolerance for higher unemployment; and working-age people, Aucklanders and those in households earning $100,000 to $150,000 were more concerned about real income growth and housing affordability.
There were statistically significant differences in responses between Māori and non-Māori respondents. Māori respondents, on average, were willing to accept a 1.28 percentage point increase in inflation to obtain a 1 percentage point reduction in unemployment.
Forty-three percent of Māori respondents were worried about unemployment rising about 3.2 percent, as were 51 percent of respondents from minority ethnicities.
"By removing it from the remit objectives it is clearer that this is a communication requirement, which should support the credibility of the Reserve Bank's commitment to its price stability and employment objectives." – Chris Bloor, Reserve Bank
Unemployment has since risen to 3.4 percent, and the bank projects it will rise to 5.2 percent in 2025. That will be updated on July 12, in its next interest rates decision.
"Monetary policy decisions affect different demographic groups in complex ways," the bank's advice to Robertson says. "It is important that the Reserve Bank understands the preferences across society to inform our understanding of the trade-offs between the inflation and maximum sustainable employment objectives."
The bank advised the minister to remove house prices from the remit. "This requirement has been misinterpreted by some commentators, and retaining it carries an ongoing risk of this misinterpretation," the bank warned.
"Removing the clauses – or addressing house price sustainability through other avenues – would also reduce the overall complexity of the Remit, supporting greater public clarity."
The Reserve Bank had consistently opposed the inclusion of house price sustainability in its remit. The requirement that it assess the impacts of its decisions on house price sustainability was unique among central banks, it said in a consultation paper for this year's remit review.
"Attempting to use monetary policy to reduce unsustainable house price inflation would conflict with achieving price stability and supporting maximum sustainable employment, and may create public expectations that the monetary policy committee is unable to meet."
This week, the Reserve Bank's manager for economics policy analysis, Chris Bloor, says the move from the remit to the charter will not change the requirements on the monetary policy committee, so will not result in a material change in how monetary policy decisions are made.
"However, the previous requirement in the remit had often been misinterpreted as a formal objective to consider house prices in decision making," Bloor says.
"By removing it from the remit objectives it is clearer that this is a communication requirement, which should support the credibility of the Reserve Bank's commitment to its price stability and employment objectives."
