RBNZ's lower LVR equals a 50 bps rate rise
The Reserve Bank of New Zealand has estimated its 'speed limit' on low deposit mortgages in October reduced inflation pressures by an amount similar to the impact of a 25 to 50 basis point increase in the Official Cash Rate.Deputy Governor Grant Spencer gave the fresh estimate in a speech to the Credit Suisse Asian Investment Conference in Hong Kong, where he outlined how the bank was coordinating the macro-prudential tool with its monetary policy. He also gave a more detailed indication of the conditions needed for the limit to be relaxed or removed.The latest estimate is slightly stronger than the Reserve Bank's estimates before the introduction on October 1 of the limit on mortgages with a loan to value ratio (LVR) of over 80 per cent.Back then, the central bank and financial regulator estimated it would have the same effect as a 30 bps increase in short term interest rates. The bank also said earlier this month the limit had already slowed house price inflation by around 2.5 per cent, which is slightly faster than originally forecast.Spencer said there was a case for the bank to coordinate its monetary and macro-prudential policies when the effects over-lapped. Until now the bank has been cautious about muddying the waters between the two types of policy, given macro-prudential policy is aimed at strengthening the financial system by reducing the risks of a housing bust, while monetary policy is aimed at keeping inflation around the bank's 2 per cent target. "We believe it is essential to retain clear primary objectives for both monetary and macro-prudential policy. These primary objectives are price stability and financial system stability respectively," Spencer said."However, there is an appropriate role for policy coordination in certain circumstances and with certain policy tools. The key in this respect is to ensure that the primary aims of the two policy arms are not undermined by too heavily diverting the attention of those policies to secondary objectives," he said.Spencer said the bank preferred to allow monetary and macro-prudential policies to support each other as long as each policy was focused on its main objective."Macro-prudential tools vary in their ability to affect the macro-economy. Also, if they are pushed too hard they can lead to disintermediation and efficiency costs. Monetary policy can have a significant influence on financial stability, but if diverted too far from its main purpose could undermine confidence in the commitment to price stability," Spencer said.The speed limit was aimed at reducing the threat to financial stability by dampening the rapid growth in house prices and strengthening households' and banks' balance sheets."They have also been an important consideration in the Reserve Bank's monetary policy assessment. The dampening effect of LVRs on house price inflation is estimated to have reduced CPI inflation pressures by an amount equivalent to a 25 to 50 basis point increase in the OCR," Spencer said, adding it had reduced upward pressure on the New Zealand dollar.He said the bank's monetary policy tightening, which started on March 13,