Reserve Bank may further ease LVRs

by Ksenia Stepanova01 Jul 2019

The Reserve Bank of New Zealand has indicated that it may further ease loan-to-value ratios (LVRs) if credit and house price growth remains at a moderate level, and if banks can maintain “prudent lending standards.”

Speaking at a conference at Otago University, Reserve Bank Deputy Governor Geoff Bascand discussed the role of LVRs in reducing threats to New Zealand’s financial system, and in mitigating any negative impact on the economy. He says the Reserve Bank has refreshed its strategy for using macroprudential policy, and that this re-evaluation was informed by its experience in using LVRs to improve the resilience of mortgage loans.

“Financial stability is important for the wellbeing of New Zealanders, and macroprudential policy is a key line of defence for safeguarding financial stability,” Bascand said.

“Our refreshed strategy on macroprudential policy provides us with greater clarity on how we will use macroprudential tools in the future, and provides New Zealanders with the confidence they need that the financial system is in good hands.”

“The Reserve Bank’s LVR restrictions have been successful in reducing some of the risk associated with high household indebtedness,” he continued. “Our analysis showed that as a result of introducing the LVR policy, resilience of the banking system has increased, while side effects have been limited, and that’s a good outcome.”

LVR restrictions were last eased in January of this year, with Governor Adrian Orr noting that they were designed to be flexible in response to the level of risk.  Commenting on future strategy, Bascand said that further easing of LVRs is possible if the risk environment remains favourable.

“So that tools can be utilised when they need to be, the Reserve Bank needs to maintain operational independence in macroprudential policy, supported by transparent communication and clarity about its objectives,” Bascand said.

“While macroprudential policy cannot be used to eliminate all risks for banks and households, or sustainably lower house prices, or manage fluctuations in economic activity, it does however play an important role in supporting a healthy financial system.”

The government is currently reviewing the role of the Reserve Bank in relation to financial stability, including whether the current macroprudential framework remains fit for purpose.

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