With New Zealand house prices going up by 24% last year, the Reserve Bank of New Zealand (RBNZ) has been accused of contributing to a widening gap between rich and poor as its ultra-loose monetary policy. In a recent article, Peter Harris, an external member of the Reserve Bank’s Monetary Policy Committee, explained RBNZ’s position on the matter.

 

Here are some key takeaways from the article and answers to some pertinent questions:

Logo of the Reserve Bank of New Zealand

Q: What is RBNZ being accused of?

House prices in New Zealand shot up by 24% in 2020, raising concerns about income inequality. It’s believed that the Reserve Bank, by sticking to lower interest rates, has caused the widening of the rich-poor divide and made buying a house more difficult, especially for first home buyers.

 

Q: What’s behind the boom in prices?

According to Harris, the boom in asset prices is occurring globally and low borrowing costs are just one of a number of factors behind the increase. By cutting the Official Cash Rate (OCR) to 0.25%, the RBNZ is looking to help the economy pick up and shrug off the pandemic’s side effects. 

 

Q: Why are lower rates better? 

Lower rates spur economic activity. People can use the extra cash to invest in businesses, employ more people, build houses or just spend. Harris feels higher interest rates can dampen consumer confidence, reduce spending (thereby increasing unemployment) and push up mortgage servicing costs.

 

Q: What’s the impact on unemployment?

Because lower interest rates increase overall spending and cash in the economy, unemployment levels drop. However, while the economy has performed better than anyone expected, Harris said unemployment at 4.9% remains “relatively high” and the RBNZ is not yet meeting its employment objective. 

Q: Are the rates going to stay low for some time?

According to Harris, RBNZ is not in a hurry to increase rates and get rid of this stimulus, which means consumers will be able to enjoy lower rates for some more time.

Read the entire article here.