New Reserve Bank governor Anna Breman won't hesitate to use all the tools at her disposal if there is a severe boom in the housing market.
The RBNZ's financial stability tools include loan-to-value ratio restrictions, and debt-to-income restrictions.
In an extensive interview with Morning Report presenter and incoming RNZ business editor Corin Dann, Breman said the RBNZ was a full-service central bank, and it meant it could act when it needs to.
She said it also applied to severe downturns which can knock household confidence.
Breman was asked about housing market fluctuations and what are known as macroprudential tools, like debt-to-income ratios and loan-to-value ratios in banks, to try to control booms and busts.
She said it was excellent that the Reserve Bank had the tools for booms or busts.
"We know from historical experience and from a lot of research literature that when you have a severe downturn in the housing market, that means that households tend to be cautious for a while, which is reasonable.
"They know they might have high debt levels compared to the value of their home. They tend to save more over a long period of time. So having a house price crash will affect the economy and that is a severe downturn and difficult to get out."
Breman spoke to RNZ a day after she took the unusual step of issuing a statement about financial conditions, which she believed had gone "beyond" the RBNZ's recent projection for interest rates.
It came on the heels of some banks raising interest rates, believing the bank may raise the official cash rate, despite it cutting the OCR to 2.25 percent late last month.
"Financial market conditions have tightened since the November decision, beyond what is implied by our central projection for the OCR," she said in the statement. There was still the possibility of another rate cut from the path forward published in the bank's November Monetary Policy Statement.
Breman told RNZ it was important for markets to understand how she was reading the economic data.
"I am rather new in my role - still just about two weeks into it - and I thought given that it's a long time until the next monetary policy meeting in February, I thought it was reasonable for markets to see how I read the economic data and also to see how I relate compared to the last Monetary Policy Statement."
She said she did not want to say whether markets were right or wrong, but the forecast the Reserve Bank had for the official cash rate was different to how the market reacted.
"So there is still a small probability, but it's still a probability, that we'll do another rate cut in the near term. We will get much more information how the economy is evolving over just the coming days. We'll get GDP numbers, we get inflation numbers out in January and all of this will be important when we go into our next meeting."
Breman - a Swedish economist who was First Deputy Governor of the central bank of Sweden until taking over NZ Reserve Bank Governor on 1 December - said she would not hesitate to make a statement again. She said transparency was important.
"Given I am new in my role, if I comment on monetary policy, I do want everyone to have that information at the same time."
New Reserve Bank Governor Anna Breman. Photo: RNZ / Samuel Rillstone
Covid
Breman described how she had been part of the monetary policy response for the Sveriges Riksbank, Sweden's central bank. The country was known for responding quite differently in the Covid crisis to New Zealand - the Ardern government here pursued an elimination strategy, Sweden's was more of a light touch.
"I was in the room when we made monetary policy decisions during Covid and we saw a deep recession coming. We saw even though maybe there were differences in exactly how the restrictions and the lockdown was done, we saw the economy almost in free fall.
"So it was a very severe situation and we acted to support the economy in different ways. So I think in that respect, all countries experienced a lot of both, obviously human suffering but also suffering in terms of economic loss because of the pandemic."
In a wide-ranging interview, she was asked about the state of the New Zealand economy after Covid.
"I think that what we're seeing now is that New Zealand has had several years with weak growth, a weak labour market, and we're starting to see the economy recovering.
"And from my perspective, given that we see inflation also falling and being low and stable going forward, it's very important now that we see growth that's lasting, that we see that we have a period where growth is coming back. We see stronger labour markets while of course keeping inflation low and stable. So it's very important and that's also why I wanted to stress (in my statement yesterday) that the cut that the Reserve Bank did in late November that was really to support economic growth going forward."
Cash
Breman believed it was important that people continued to have access to cash.
In a statement in November, the Reserve Bank said its research showed 80 percent of adults use cash sometimes, over half (56 percent) store cash and 8 percent rely on cash.
Breman said: "It is very important that people still have access to cash and as part of our job to ensure that. And the two parts of it is for financial inclusion. People need to be able to pay and sometimes cash is the best option. It's also crisis preparedness. We saw that with the cyclones. There could be other reasons why the digital systems are vulnerable to attacks. So having cash in a society is important and that's one of the things that we're working with."
Watch the full interview on rnz.co.nz on Wednesday morning
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