The Reserve Bank is back in a familiar place - between a rock and another rock.
For the third time in three years the Reserve Bank faces conflicting objectives in which achieving one could obstruct or destroy the other.
Our central bank is unusual in that it is responsible for monetary policy, which means keeping inflation between 1-3 per cent, and for financial stability, which means ensuring the banking system is stable.
It worked brilliantly during the Global Financial Crisis, but now it's a pain in the proverbial.
It needs to cut the Official Cash Rate to stimulate the economy to get inflation back into that target range.
Inflation figures out this week showed annual Consumer Price Index inflation of 0.4 per cent in the March quarter, which means it has been below the bottom end of the bank's target range for 18 months and below the mid-point for 4 years.
But at the same time the Reserve Bank has to keep the banking system stable and it has been worried since at least 2013 that Auckland's over-valued housing market could fall sharply and stress our big four banks.
It knows that ever-lower interest rates will encourage more borrowing to buy houses, potentially pumping more air into a bubble and adding to the stress in the event of a slump.
This conundrum drove the Reserve Bank to bring in two rounds of controls on mortgage lending.
The first round in November 2013 introduced an 80 per cent Loan to Value Ratio limit on all borrowers. The second round in November last year tightened that limit to 70 per cent for rental property investors in Auckland.
Auckland is off to the races again and the provinces are galloping along in its wake.
With the Government's two-year bright line test to tax the capital gains of speculators, the Reserve Bank's second round slowed the Auckland market for all of five months, and may have fired up the housing markets in the provinces.
The Real Estate Institute's March figures released last week removed any lingering hopes last year's measures would take some of the steam out of the market for longer than a few months.
Auckland is off to the races again and the provinces are galloping along in its wake. The Reserve Bank now faces an ugly combination of double-digit house price inflation nationally, falling mortgage rates and a rising currency.
It has already forecast one more OCR cut, possibly as early as Thursday, and most economists think it will have to cut for a third time this year to 1.75 per cent.
It is time for the Reserve Bank to get ahead of the curve and take a more strategic approach. It should make clear to banks and borrowers that it will have to progressively tighten lending in line with further cuts in interest rates.
At present, New Zealand's landlords see a one-way bet.
They see central and local Governments failing to allow enough new house building to meet supply. They see interest rates falling and little political appetite to tax capital gains or land.
The only thing standing between landlords and yet more easy money is the ability to leverage their ample stocks of equity.
It is time the Reserve Bank took on that responsibility, if only to give itself some breathing space between those two rocks of very low CPI inflation and very high house price inflation.
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