This week the newly formed Government met with the Reserve Bank and has announced that it is going to set up a review to monitor and possibly amend the measures used by the central bank to assess and control monetary policy. The Reserve Bank, which is independent of whichever government is in office is “responsible for formulating and implementing monetary policy, promoting a sound and efficient financial system, and carrying out other functions and exercising other powers as set out in the Act.” This description is taken directly from the bank’s own website (rbnz.co.nz) as a description of their legislation under the Reserve Bank of New Zealand Act (1989), but how does the act and the Reserve Bank’s decision making directly affect you?
One of the main functions of the bank is to carry out regular reviews of monetary policy in order to control interest rates. It has traditionally done this based on the rate of inflation, which it aims to keep between 1-3%. Inflation is driven by economic growth and factors such as the housing market, import and export figures and overseas monetary policy decisions which may affect the NZ money and stock markets. The review being suggested by the Government wants an additional focus on employment statistics, and new finance minister Grant Robertson stated that "Every part of the economic apparatus needs to play its part in this, including monetary policy."
It will take a while for any new legislation to be put in place and shouldn’t directly affect the decisions being made in the immediate future regarding the Official Cash Rate (OCR). The OCR which has remained at a historically low level since the end of 2016 is reviewed eight times a year and controls the rate that affects interest rates for home loans and investments. It was established as an economic control mechanism on the back of a major stock market crash in March 1999 which saw Interest rates rise at a phenomenal rate. Whether the rate is cut or increased is not the issue for most home owners. It’s the resulting changes that the banks make which affect borrowers cash flow, budget and equity position that become much more important. At present, there are no changes expected to the OCR in the foreseeable future, and based on economist’s forecasts this will remain to be the case until late 2018 at the earliest.
But it is not just the setting of the OCR and reviews of monetary policy that the Reserve Bank is responsible for. It also regulates and licenses banks and insurance companies and sets measures in place which it hopes will help control the economy. In the past this has seen the introduction of higher deposit requirements for rental investors and requirements for bigger deposits from first home buyers. There may be other moves in the future, and even a relaxation of some of those restrictions but for now, any borrowing or loan structure decision should be based on a number of factors which you should discuss with your adviser in order to determine the most cost effective option for your lending.
