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By Stephen Wright

WELLINGTON, New Zealand--The Reserve Bank of New Zealand rebuffed the government's call for house prices to be included in its monetary policy goals, citing possible negative economic effects, and recommended creation of a new agency to address housing shortages.

Adding housing to the central bank's policy remit would have only a limited impact on property prices and in some situations could lead to lower employment and below-target inflation, the RBNZ said in a letter to the finance minister released Friday.

The central bank reasoned that if it were legally obliged to target house prices, then interest rates could be higher, which would lean against economic activity through several channels.

It said lower employment would have the most impact on groups already disadvantaged in the labor market including Maori and young people.

Finance Minister Grant Robertson had asked the central bank to consider whether housing should become part of its remit after record-low interest rates, in response to the pandemic, combined with longstanding tight supply triggered a record surge in house prices.

The central bank said its preference is to include housing as part of its financial stability mandate. That would strengthen its contribution to a broader government response to housing shortages and recommended the creation of a coordinating agency, it said.

The RBNZ also requested that the government consider adding debt-to-income limits to the tools that the central bank can use to regulate mortgage lending.

"Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency, by reducing public understanding of the objective of monetary policy," the RBNZ said.

Fast-rising house prices have prompted a lively debate in New Zealand about housing affordability and inequality. The wealth effect for residential property owners may help the economy weather the pandemic, but the rapid increase in prices also puts home ownership out of reach for some New Zealanders.

Legislation governing the central bank requires it to target sustainable employment and stable inflation without causing instability in the New Zealand dollar, interest rates and economic growth.

Write to Stephen Wright at stephen.wright@wsj.com

(END) Dow Jones Newswires

12-10-20 1830ET