REPEAT:MNI RBNZ Warns Rates Could Rise If Funding Costs Go Up

Repeats Story Initially Transmitted at 23:55 GMT May 29/19:55 EST May 29

--No Changes in LVR Policy For Now But More Easing Will Done In Future

--Governor Orr Says Any LVR Easing Unlikely Until At Least Next FSR

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand warned that domestic

interest rates could rise if funding costs for banks' rise even though monetary

policy is not expected to tighten for some time.

     Funding costs can increase quickly if higher global growth causes

inflationary pressures to rise in New Zealand or if higher global risk premiums

increased New Zealand banks' funding costs, the RBNZ said, in the semi-annual

Financial Stability Report published Wednesday.

     "The impact of sharply rising interest rates on the New Zealand economy

would be broad, but it would be felt most by the household and dairy sectors.

These sectors carry high levels of debt and are exposed to swings in asset

values," the RBNZ said.

     New Zealand's net funding needs from abroad is around 55% of GDP and

exposes it to the risk of sudden changes in foreigners' willingness to lend to

New Zealand residents. While banks hedge most of their foreign currency

borrowing, they are still vulnerable to a sharp increase in funding costs or a

reduction in availability of funding from overseas.

     "The most prominent international risk is disruption from a rapid increase

in global interest rates, as central banks tighten monetary policy," the RBNZ

said.

     At the media conference, RBNZ's head of macro-financial department Bernard

Hodgetts said the household sector would "probably cope" with a rise in interest

rates. But it any abrupt increase in interest rates that could be worrisome as

some households may struggle due to their high levels of debt.

     Interest rates could rise abruptly if market react dramatically to monetary

policy tightening around the globe. As long as the rate increases are orderly,

households can cope, he added.

     On macro-prudential policy, RBNZ said it doesn't see a need to further ease

loan-to-value restrictions on mortgages but will ease it in future if housing

market risks decline and banks maintain prudent mortgage lending standards.

     The RBNZ said that the full effect of the small easing in the LVR policy

made in November is still working through, and no further changes is deemed

appropriate for now.

     However, "the policy will be eased further in the future if housing market

risks decline and banks' lending standards for new mortgage loans are prudent,"

the RBNZ said.

     The RBNZ said the LVR policy has been successful as it has reduced the

concentration of mortgage lending at high LVRs and reduced the share of lending

to investors. But some households still have very high levels of debt and while

those risks have eased in the past 12 months due to slowing credit growth and

house price inflation, they still remain.

     At the media conference, Governor Adrian Orr any easing is unlikely at

least until the next Financial Stability Report which is due in late November.

     "We use this document for making those assessments," Orr said.

     The dairy farming sector remains highly indebted and vulnerable to a future

downturn in dairy prices, with the spread of the Mycoplasma bovis (M. bovis)

disease an emerging risk for the sector, the RBNZ said.

     The RBNZ said the spread of the M. bovis infection could reduce the

productivity and profitability of the sector, and could lead to losses on bank

lending to the dairy sector.

     "At time of writing, it is not known how widespread the disease has become

and how the Government and industry will manage the response. Both factors will

affect the impact of the disease on the ongoing profitability of the sector and

losses to banks," the RBNZ said.

     Earlier this week, the government announced plans to eradicate the disease

over time which would result 126,000 cattle being culled in addition to the

26,000 already in progress.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com