Breakingviews - Kiwis test limits of overburdened rate setters

New Zealand's Finance Minister Grant Robertson reacts during an interview in his office in Wellington, New Zealand, November 10, 2017.

LONDON (Reuters Breakingviews) - New Zealand led the way in central banking in the past. Now, the country that first formally asked independent monetary policymakers to target inflation is offering a lesson in the problems of overburdening rate setters.

Finance Minister Grant Robertson said on Tuesday he had written to the central bank and asked for advice on whether house prices should be considered when setting monetary policy. The suggestion might sound innocuous, especially given residential real estate prices have nearly doubled in value over the past decade, according to data published by the Reserve Bank of New Zealand.

After all, central banks already take into account a host of considerations, including asset prices and financial stability. But there’s a difference between weighing up how house prices might affect the central bank’s primary goals and taking them specifically into account when setting interest rates, even if the government isn’t pushing for an official change to the RBNZ’s mandate.

That was already expanded in 2019 to target maximum employment, alongside inflation. While the economy has rebounded since the second quarter, when it fell into its deepest recession on record, the central bank said in November that inflation and employment would remain below target for a prolonged period. That prognosis led rate-setters this month to leave the key policy interest rate unchanged at a record low 0.25% and to introduce a new funding programme that will reduce costs for lenders.

It’s unrealistic to expect monetary policy to do much to rein in the racy housing market when the RBNZ, like many peers, is focused on trying to stimulate economic activity. There are better levers to do this, some of which the central bank is using. For example, the RBNZ said on Wednesday it would reimpose mortgage lending curbs, so-called loan-to-value restrictions by March 2021. And governments can always cool housing markets by hiking stamp duty or capital gains tax on property.

Interest rates are a blunt instrument that can’t hit too many things at once. Politicians would do better to rely on the obvious tools to fix problems, even if they are politically unpopular.


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