The Chief Economist of the Reserve Bank hit the headlines this week for saying that "the worst situation we could face right now would be to see house prices fall". However, it's not part of the Reserve Bank's legal mandate to make such sweeping statements about what it considers to be good or bad for the overall prosperity of the nation. The RBNZ consists of bureaucrats who have not been elected by the public. They are charged with achieving price stability, defined in terms of the consumer price index, high rates of sustainable employment and a stable financial system.
Last September, Newshub reported that stress testing of banks' balance sheets carried out by the Reserve Bank showed that in "a one-in-50-year event where unemployment hits 13.4 per cent and house prices fall by 37 per cent, bank's capital levels would remain above the requirement and they could keep lending money". In other words, the Reserve Bank's own estimates have shown that our private banks would be able to survive a large drop in house prices without the financial stability of the banking system being threatened.
DownToEarth.Kiwi says the Reserve Bank should stick to its knitting - the Bank's statements about the housing market should be confined to its impact on the objectives that the Bank is charged with achieving. And the Bank has already produced evidence that the financial system COULD happily deal with a big drop in house prices.
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