Co-ordination of Monetary Policy and Macro-prudential Policy

1. Co-ordination of Monetary Policy and Macro-prudential Policy Grant Spencer Reserve Bank of New Zealand Credit Suisse Asian Investment Conference March, 2014

2. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

3. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

4. Policy interactions make a case for coordination

5. Coordination is straightforward in most situations

6. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

7. What can macro-prudential do for price stability? • Not all macro-prudential tools impact the economic cycle • Macro-prudential can target “hot spots” and may reduce exchange rate pressures • Macro-prudential buffers may help moderate the down cycle – and avoid the ZLB • But disintermediation effects can be damaging if prudential policy pushes too hard

8. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

9. What can monetary policy do for financial stability? • Prudential policies alone have limited scope to contain asset bubbles – monetary policy is more powerful • Interest rates “too low for too long” or sharp increases can impact financial stability • But diversion of monetary policy from main purpose could undermine confidence in the commitment to price stability

10. The clean versus lean debate

11. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

12. New Zealand policy framework

13. Coordinating monetary and macro-prudential policies • The case for policy coordination • What can macro-prudential do for price stability? • What can monetary policy do for financial stability? • Policy framework in New Zealand • Current policy situation

14. LVR speed limits are slowing the housing market Housing market trends since the introduction of LVR speed limits, Oct 2013 LVR impact on CPI inflation approx equal to 25-50 bp on OCR

15. Monetary policy tightening cycle started in March 90-day interest rate projection Greater scope to remove LVRs as higher rates moderate housing

16. Conclusion: conditional policy coordination • Sensible to coordinate monetary and macro-prudential policies – to a degree • But primary objectives of each policy must be kept clear • Monetary policy → price stability • Macro-prudential → financial stability • Excessive deviation in support of secondary objective can be damaging

17. End of presentation