Reserve Bank of New Zealand Governor Graeme Wheeler on Thursday indicated that the bank may consider tightening policy in 2014 if the overheated housing market stokes price pressures.
At the same time, he noted that the bank will keep the Official Cash Rate unchanged through the end of this year.
"The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures," Wheeler said while announcing the bank's decision to hold the OCR unchanged at 2.5 percent.
"Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year," Wheeler said.
He noted that the CPI inflation has been very low over the past year, reflecting the high New Zealand dollar and strong international and domestic competition. However, the bank expects inflation to trend upwards towards the mid-point of the 1-3 percent target band as growth accelerates over the coming year.
Wheeler said the Reserve Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of the supply response.
In May, Wheeler signed a memorandum of understanding with Finance Minister Bill English, which awarded the central bank will more powers to curb excessive growth in credit and asset prices in the country through the use of four macro-prudential tools.
The tools included adjustments to the core funding ratio, a countercyclical capital buffer, adjustments to sectoral capital requirements and quantitative restrictions on the share of high loan-to-value ratio (LVR) loans to the residential property sector.
In addition to this, the central bank is expected to announce measures to limit low-deposit mortgage lending to cool the housing market.
Deputy Governor Grant Spencer said on June 27 that limited house supply was at the heart of the problem and strong demand supported by easy credit was underpinning the rapid escalation of house prices.
However, he said housing cannot yet be described as a threat to overall inflation, given some slack still in the economy. Nonetheless, Spencer opined that higher interest rates are not the right policy response at this time and that the bank is seriously considering the use of macro-prudential policy tools.
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