RBNZ talks up macro-prudential policies

Reserve Bank of New Zealand governor Graeme Wheeler has talked up the bank's macro-prudential policies to a Bank For International Settlements conference in Wellington.

Speaking to an audience grappling with booming housing markets but unable to use interest rates to reduce these booms' financial risks, Wheeler said the policies adopted in New Zealand to reduce riskier mortgage lending and improve bank funding sources had strengthened New Zealand's financial stability.

He said house prices had risen rapidly in several Asia-Pacific countries in recent years, including Australia.

"Strong housing demand can add to financial stability risks, especially when accompanied by high household indebtedness. Housing market exuberance can be particularly problematic when interest rate responses are not warranted because economic growth is well below potential, and inflation in factor and product markets is benign," Wheeler said.

"Macro-prudential policies can be helpful in addressing financial stability concerns in such circumstances. But the introduction of macro-prudential policy requires policy makers to be clear about its goals, the duration of the measures, and how such measures might interact with monetary policy," he said.

Wheeler referred to the bank's speed limit on high Loan to Value Ratio (LVR) loans introduced in October last year, which he said helped reduce the risky lending and helped slow house price inflation at a time when the bank could not use interest rate hikes to slow the market.

"We believe the dampening impact of LVRs on house price inflation and credit, and the diminished 'wealth effects' on spending associated with it, have reduced consumer price inflation pressures by an amount similar to a 25-50 basis point increase in the OCR," he said.

"In essence, the reduction in housing pressures allowed us to delay the tightening in interest rates, thereby reducing the incentive for any additional capital inflows into the New Zealand dollar in search of higher yields."

Wheeler repeated that the speed limit was never intended to be permanent and would be reviewed in next month's Financial Stability Review, which is in line with previous bank comments.