Low-equity loan limits worth one or two rate hikes, says RBNZ’s Spencer
The Reserve Bank's speed limits on low-equity mortgage lending helped stifle inflationary pressures by an amount similar to one or two interest rate hikes and may have taken pressure off the high value of the kiwi dollar, according to deputy governor Grant Spencer.
Speaking at the Credit Suisse Asian Investment Conference in Hong Kong, Spencer said monetary and macro-prudential policies have separate primary objectives, though there is a case for coordinating their use to meet both goals.
In the case of New Zealand, where house price inflation accelerated through much of last year, imposing limits on high loan-to-value ratio lending meant the Reserve Bank wouldn't make an already elevated currency more attractive by increasing interest rates.
This had been an "important consideration in our monetary policy assessment," even though LVR's are aimed at financial system stability rather than monetary conditions, Spencer said.
"The dampening effect of LVRs on house price inflation and credit is expected to reduce wealth and credit effects on consumption that might have otherwise increased due to a rapid expansion in house prices," he said. "This, in turn, is estimated to have reduced CPI (consumers price index) inflation pressures by an amount similar to 25 to 50 basis point increase in the OCR (official cash rate)."
The bank has previously estimated the impact of the LVR restrictions as similar to about 30 basis points of interest rate increases.
New Zealand's central bank embarked on a policy of raising interest rates this month, raising the OCR 25 basis points to 2.75 percent, as it looks to tame the threat of future inflation as the local economic momentum gathers speed. A string of increases of between 25 and 50 basis points is expected over the next couple of years as stimulus provided by low interest rates is gradually removed while the economy recovers.
Had the LVR restrictions not been in place, "the tightening cycle might have needed to be more accentuated," Spencer said. "While the main benefit of the LCRs has been to redress the impact of the easier lending conditions, they may also have helped to take some pressure of the New Zealand dollar exchange rate."
The kiwi dollar rose to a new post-float high 80.48 on a trade-weighted basis today, above its previous high point last week. The local currency has been in favour among international investors due to the strong economic growth prospects, and track for rising interest rates.
Spencer said the current monetary policy tightening is motivated to keep inflation near the 2 percent mid-point of the central bank's 1 percent to 3 percent target band, though it might have spill-over effects in helping financial stability if it helps reduce the pace of house price inflation.
The bank estimates the loan limits have reduced annual house price inflation by 2.1 percent since September, with a 13 percent drop in monthly house sales.
Spencer said the restrictions will be removed once house market pressures have moderated, and the bank is confident there won't be another bout of rapid house price inflation.
"A decision to ease or remove LVR restrictions will ultimately take into account both the financial stability and price stability implications of doing so," he said. "We will be alert that the removal of LVR restrictions could produce a resurgence in house price inflation, which would potentially undermine both financial and price stability."