If New Zealand house prices were to falter, even more if they were to fall back somewhat over the next year or two, as several commentators are now suggesting is very likely, we could quite quickly see a rapid slow-down in the growth of household sector borrowing followed by a down-turn in investment in housing and a rather broader slowdown in consumer spending.
The difference between normal and abnormal times is therefore not what we are trying to achieve – it is how we strive to achieve it. In normal times, central banks affect this array of interest rates by steering the overnight interest rate and influencing expectations. We do the former through setting policy rates and the latter by communicating transparently our reaction function.