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RBNZ prepared to constrain asset bubbles

Reserve Bank of New Zealand

News Release

30 January 2004
RBNZ prepared to constrain asset bubbles

The Reserve Bank today revealed that in rare circumstance it is prepared to adjust monetary policy to constrain extreme asset price bubbles, whereas normally the Reserve Bank is only required to ensure consumer price stability.

In a text prepared for the Canterbury Employers’ Chamber of Commerce, Reserve Bank Governor Alan Bollard said using monetary policy to constrain asset price bubbles was risky, but in an extreme situation “the fallout from the build-up and bursting of very large asset price bubbles warrants taking some risks in an attempt to moderate … the problem.”

Dr Bollard said that the current run-up in house prices was not so extreme that it warranted an extraordinary response. He said “Yesterday’s interest rate increase was just part of the normal operation of monetary policy to ensure continuing consumer price stability.”

However, Dr Bollard did say that faced with a repeat of the extreme gains in the share market in the mid 1980s “a Reserve Bank Governor might well say extraordinary measures were required”, to avoid the crash that would otherwise follow.

Dr Bollard warned that in that rare situation “Seeking to stabilise rising house prices or an overheated stock market might mean having to force inflation lower than otherwise would be required. It might also mean greater variability in the real economy, interest rates and, potentially, the exchange rate.

“We are talking about circumstances where monetary policy may well have to be quite tight – tighter than if the sole objective was to keep consumer price inflation within the target range. In such circumstances, I expect many audiences would say that the Bank was unnecessarily squeezing growth from the economy.” However, Dr Bollard said the international evidence showed that asset price “booms and busts” sometimes caused substantial damage to households, economic growth and, in rare cases, the financial system. Trying to constrain a growing asset bubble would not be popular, he said, but central bankers were required to makes decisions that were in the public interest.

To read the speech click on the following link

http://www.rbnz.govt.nz/speeches/0145812.html#TopOfPage


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