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NZD/USD has jumped after the Reserve Bank of New Zealand (RBNZ) considered adding house prices to its mandate. As economists at Rabobank note, including rising house prices in calculating inflation would imply tighter monetary policy and that is why the kiwi has climbed as high as 0.6990. 

Key quotes

“New Finance Minister Robertson has proposed adding house prices to the central bank’s remit. In other words, not only would the RBNZ have to keep CPI around 2%, but it would also have to keep house price inflation stable.”

“Lower rates are needed to try to keep inflation up but lower rates push house prices through the roof, and so the opposite is needed. What’s a central bank to do? Of course, there are always macro-prudential measures to limit mortgage lending. Yet then one ends up flattening the property market and/or reducing first-time buyers’ ability to get a home loan, and a lot of the time the property market IS the economy, meaning that rates then need to go even lower, and macroprudential measures become even tighter. 

You can go the neoliberal route, as we have for decades,…and you end up with an oligopolistic, plutocratic, distorted global economy dripping with populism, or worse. You can try to stay neoliberal and micromanage parts of the economy to get the series of contradictory outcomes you want (e.g., low and stable inflation AND high-but-not-too-high and stable house prices), but it ends badly. Or you can realise this whack-a-mole sees one have to become ever-less (neo)liberal on all manner of fronts and just cut to the chase and go back to Bretton Woods, or worse – if that were even possible.

“In the short-term, expectations of negative RBNZ rates have withered and NZD is up, as it logically should be – which is just what exporters don’t want to see, of course, and leads to even more reliance on domestic demand and the housing ‘wealth effect’.”


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