In an article in its latest Reserve Bank Bulletin, Ashley Dunstan has written an article on the interaction between monetary and macro-prudential policy, expanding on an early speech by Reserve Bank deputy governor Grant Spencer.
Dunstan said, of the tools available to the Reserve Bank, the LVR restrictions were the most likely to dampen rapid growth in asset prices.
The other macroprudential tools - a counter-cyclical capital buffer, sectoral capital buffers and changes in the core funding ratio – were more geared towards building financial system strength, Dunstan said.
“The potential for LVR restrictions to dampen rapid growth in house prices played a strong role in the Reserve Bank introducing a speed limit on high-LVR lending.”
Dunstan said the slowdown in the market had been about in line with what had been expected.
The dampening effect of the restrictions on credit and asset prices was likely to have reduced domestic demand in the wider economy as well, as households found it harder to borrow and there was less “wealth effect” from rising prices.
That had kept the pressure off the OCR, Dunstan said.
Dunstan said because the restrictions targeted housing specifically, it would have taken a much larger increase in the OCR to have the same impact on house price inflation as the rules had had, and so the restrictions might have allowed for easier conditions in non-housing sectors and a lower exchange rate.
“The Reserve Bank estimates that, in relation to the impact on inflation pressures, the speed limit has resulted in the OCR being 25-50 basis points lower than otherwise…The speed limit has also reduced the need for monetary policy to contemplate tightening in response to housing-related financial stability concerns. This experience suggests that LVR restrictions can delay but by no means substitute for, a monetary policy tightening cycle.”
Dunstan reiterated that the rules were not a permanent fixture.
“The Reserve Bank always intended that the speed limit would be temporary, reflecting the likelihood that regulatory leakage would undermine their effectiveness if they were in place for several years.”
A decision to ease or remove LVR restrictions would be based on financial stability considerations and evidence of a sustained moderation the risks associated with house price inflation, Dunstan said.
