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RBNZ, Treasury talk up global economic risks in briefings to Finance Minister Joyce

Friday 17th February 2017

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The Reserve Bank and the Treasury warned incoming Finance Minister Steven Joyce about the international threats posed to New Zealand's economy, which they both saw as being relatively robust. 

In separate December briefing documents to Joyce, both the central bank and the Crown's financial adviser said the local economy was performing well, with robust growth projected and the impact of the Kaikoura earthquake expected to be limited. However, they both also cited the global outlook as producing downside risks, with the RBNZ saying it was "the greatest threat" to local expansion, and could also trigger a correction to the housing market, which was the bank's main domestic concern. 

At the time, those risks hadn't changed the Reserve Bank's view on the direction of monetary policy, with a November cut to the official cash rate taking it to a record low 1.75 percent and a track of no change built in for the next couple of years, although the bank's review this month introduced the chance of a rate hike in 2019. 

Treasury secretary Gabriel Makhlouf told the minister the debate on protectionism in the US and parts of Europe had created uncertainty in international markets, and was "a threat to New Zealand's prosperity if it leads to reductions in global trade", which needed to be addressed proactively and seizing "the opportunities presented by Asia's ongoing growth". 

Makhlouf outlined a number of topics the Treasury wanted to broach with Joyce, including the budget process, tax, housing affordability, social housing, the social investment approach, the changing global environment, macroeconomic issues such as the RBNZ's policy targets agreement, the business growth agenda, and the pension and New Zealand Superannuation Fund. 

Joyce yesterday delivered his first major speech as finance minister, extolling the strength of the local economy and saying his focus for the May 25 budget was improving public services, building infrastructure, repaying debt, and cutting taxes. He also ruled out a regional fuel tax as a means to address Auckland's transport funding needs but he did put forward the prospect of electronic tolling as a means to replace petrol taxes and road user charges at some point in the future.  

He fronted select committee for the half-year forecasts earlier this month, warning potential property buyers about paying too much at a time when interest rates could rise, while also sending the RBNZ back to do more work before giving them a new tool to limit mortgage loans as a ratio of a household's income. 

The RBNZ had told Joyce it considered banks didn't internalise the risks facing mortgage borrowers in a severe downturn, and that debt-to-income lending ratios could limit the cyclical nature of lending practices to produce a more efficient market. 

At the time of the briefing, the central bank's two highest priority policy initiatives were bank outsourcing, which it recently put out a new discussion paper on, and the International Monetary Fund's missions to review New Zealand financial sector regulation and supervision, with reports expected in April or May of this year. 

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