WELLINGTON: A brace of interest-rate cuts delivered 11,000 miles apart this month reveals how central banks are finding a modern way to keep monetary policy easy.
The Reserve Bank of New Zealand and Norges Bank both reduced benchmark borrowing costs within a week of each other despite signs of overheating asset markets in both nations.
Handing them scope to spur economic growth and inflation were regulatory steps the central banks or other authorities are enacting in lockstep to deflate the threat of bubbles or high debt loads.
The use of so-called macroprudential tools highlights how central banks are increasingly trying to cool markets without bludgeoning them with the blunt instrument of interest rates as they may have done in the past. If successful, it means interest rates can be kept lower for longer.
It may be a taste of things to come for global monetary policy, with UBS Group AG telling investors the new mix could mean weaker currencies for those who adopt it.
“The stronger the macroprudential measures, the more comfortable a central bank can be with interest-rate cuts, ultimately triggering a corresponding currency response,” said Geoffrey Yu, a senior currency strategist at UBS in London.
New Zealand cut its benchmark interest rate on June 11 after the slowest economic growth in at least two years and despite rapid house price gains in Auckland. In acting, it noted an upcoming requirement for house deposits of at least 30 percent and said the government’s stricter enforcement of a capital gains tax “should ease the impact of investor activity.”
A week later, Norway’s central bank cut rates to a record low and signaled it may act again as soon as September even though house prices are hot and private debt levels high. A day before the decision, the government introduced new requirements for residential mortgage loans and capped their loan-to-value ratio at 85 percent with other curbs on higher loans.
New Zealand and Norway both have track records as monetary-policy innovators. The Kiwis were the first central bankers to introduce an inflation target 25 years ago, while Norges Bank began publishing forecasts for key policy rates in 2005.
Switzerland also provides evidence of how the new era of central banking can work. It has been able to keep monetary policy loose with the intention of weakening the franc partly because the government began tackling a residential-property boom with regulatory initiatives three years ago.
Whether counterparts follow may depend on individual situations. Riksbank Governor Stefan Ingves complained in March that there was no political will to pare household debt in Sweden, constraining his ability to adjust rates. The Bank of Canada has indicated it prefers to manage excesses with monetary policy rather than share the burden with regulation.
