BUDGET 2013: English signs off on Reserve Bank’s new toolkit

BUDGET 2013: English signs off on Reserve Bank’s new toolkit

By Paul McBeth

May 16 (BusinessDesk) – Finance Minister Bill English has given the tick of approval to the Reserve Bank’s new set of tools to cool asset bubbles, the most pressing of which is the country’s heated property market.

The minister has signed a memorandum of understanding with central bank governor Graeme Wheeler granting the bank regulator the ability to require lenders to hold more capital on their balance sheets against certain assets, or restrict the level of low-equity home loans, English said in a statement.

Under the agreement, Wheeler will make his final policy decision independent of the government, though the governor is expected to advice the Finance Minister of any macro-prudential policy decision.

“The objective of the bank’s macro-prudential policy is to increase the resilience of the domestic financial system and counter instability in the domestic financial system arising from credit, asset price, or liquidity shocks,” the memorandum said. “Macro-prudential tools do not replace conventional prudential regulation, but may be used from time to time to help manage the risks associated with the credit cycle.”

The Reserve Bank has been under growing pressure to cut interest rates to reduce the appeal of the currency, which has been hindering exporters, while a heating property market has provided a counterbalance by threatening inflationary pressures.

The memorandum said the Reserve Bank will have to consider the impact on monetary policy settings when using the new tools, and “in most instances macro-prudential instruments will reinforce the stance of monetary policy.”

Last week the bank said it would roll out restrictions on high loan-to-value ratio lending if it posed a “significant risk” to the system, having cited rising property values and the growing prevalence of low-equity lending as threats to the country’s financial health.

The Treasury today overhauled its forecast on house price inflation over the next five years, with annual inflation of 7.1 percent in the 2013 and 2014 years, having previously seen housing inflation peak this year at 6.5 percent, before slowing to between negative 1.3 percent and plus 1.6 percent over the following four years.

Real Estate Institute figures this week showed the stratified median housing price index, which smoothes out peaks and troughs, rose an annual 9.8 percent in the year ended April. Auckland’s stratified housing price was up an annual 14 percent and Christchurch’s climbed 13 percent.

Housing Minister Nick Smith today announced the government has reached an accord with the Auckland Council, in the first agreement with local authorities to streamline resource consents and make housing more affordable.

The Reserve Bank’s four new tools are adjustments to banks’ core funding ratio, required capital buffers during excessive credit growth, capital requirements for specific assets, and restrictions on high loan-to-value ratio mortgage loans.

(BusinessDesk)

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