Meanwhile, it has confirmed it will increase the Core Funding Ratio (CFR) for banks from 70% to 75% from next January, meaning banks will have to source more of their funding locally.
Reserve Bank deputy governor Grant Spencer, considered the favourite to replace current governor Alan Bollard when he steps down later this year, made the comments in a speech to the Financial Institutions of New Zealand's 2012 Remuneration Forum today.
"At the Reserve Bank we have been doing a lot of thinking about potential macro-prudential policy instruments and how they might be used," he said.
The four instruments currently considered viable candidates are:
- The Counter Cyclical capital Buffer
- The Core Funding Ratio
- Adjustments to sectoral risk weights
- Limits on loan to value ratios (LVRs)
Limiting LVRs could have a significant effect on house prices; banks have recently begun relaxing lending criteria and allowing more 90%+ LVR home loans after tightening up on this sort of lending post-GFC.
However, the good news is that this and the other measures could take pressure off monetary policy, enabling the OCR to remain lower, according to Spencer.
"The first point to make is that macro-prudential policy will have an important influence on monetary policy, in a similar way to fiscal policy, for example," he said.
"Thus if macro-prudential policy is acting to dampen aggregate credit and demand, there should be less work for monetary policy to do."
However, he also emphasised that macro-prudential policy cannot replace monetary policy.
"While macro-prudential can hopefully assist monetary policy, it will never be as powerful or as flexible an instrument as the Official Cash Rate (OCR)."
