MNI INSIGHT: RBNZ Ponders Toolkit As Economy Stutters

By Lachlan Colquhoun

     LONDON (MNI) - The Reserve Bank of New Zealand could use macroprudential

measures alongside more conventional monetary policy as it looks to revive a

stalling economy, MNI understands.

     The Bank cut rates by 25 basis points in May to a record low 1.5% and a

further cut this year is widely expected -- possibly in August - but the Bank

believes there is more that it can do and may revisit its Loan-to-Value ratio

(LVR) settings on home lending.

     As the prudential regulator, the RBNZ was unafraid to use LVR limits on

home lending to cool the housing sector but now that the economy is slowing, and

with it the housing market, an easing in LVRs could work in tandem with further

interest rate cuts.

     Recent RBNZ modelling suggested interest rate cuts of between 30 and 40

basis points were needed for inflation and unemployment to get to their desired

targets within a time frame of two to three years.

     At 1.5%, inflation is currently within the RBNZ's target range of between

1% and 3%, but GDP is at 2.7% and slowing. Business confidence as measured by

the NZ Institute of Economic Research is also at a 10-year low. The RBNZ

believes that growth must be at an annual 3% for its inflation targets to be

met.

     --LVR REFORM

     The Bank knows that monetary policy itself can only do so much. Enabling

more borrowers to access housing loans at cheaper rates approaches the same

problem from two complementary angles.

     The Bank is also looking at extending the LVRs, which currently apply to

the largest lenders, to all lenders in the residential mortgage markets. The

restrictions were originally intended as a temporary measure, but there are also

suggests they should be made permanent and this would give the RBNZ a

significant new policy tool.

     LVRs were first imposed to cool a surging housing market in 2013,

restricting banks from advancing more than 20% of their lending to first home

buyers with a deposit of less than 20% of a property's sale price, and no more

than 5% for investors with less than a 30% deposit. Six years on and the housing

market has cooled, with LVRs a main reason.

     Cutting the LVRs in tandem with rate cuts could not only deliver a boost to

the property market, but help revive household related spending which is closely

linked.

     Although the monetary policy and financial stability committees of the RBNZ

work separately, they share common members and both groups are aware of how

coordinating the policy levers can impact the economy.

     --CAPITAL CONTROLS

     The NZ Government recently announced NZ$15.2 billion in new operating

expenditure over the next five years, along with NZ$10.4 billion in capital

investment, all of which will undoubtedly help reboot the economy.

     But the RBNZ's proposals to increase capital requirements for the largest

banks could ultimately work against low interest rates and lending. Implementing

those capital controls, however, is a longer-term project. In the meantime, the

RBNZ has an economy to stimulate and in doing that it has two policy options.

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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