RBNZ: Governor Wheeler's speech focused on the macro prudential environment - Westpac

Satish Ranchhod, Senior Economist at Westpac, notes that this afternoon RBNZ Governor Wheeler delivered a speech entitled “Reflections on the stewardship of the Reserve Bank” to the Northern Club in Auckland and much of the speech focused on the macro prudential environment, and highlighted that existing lending restrictions were unlikely to be eased in the near-term.

Key Quotes

“There was little in terms of implications for monetary policy and the OCR.”

Key points:

The RBNZ does not think that restrictions on high loan-to-value lending should be rolled back at this stage.

• The speech noted the conditions that would be necessary for loan-to-value restriction to be rolled back. First, the RBNZ would need to see signs that financial stability risks have eased. Second the RBNZ would need a degree of confidence that the financial stability risks that LVRs aim to address won’t worsen again when they are removed.
• On the first, the Governor noted that the introduction of lending restrictions has helped to reduce the risks to the financial system, with banks now carrying less highly leveraged mortgages and house price growth easing off. 
• On the second, however, Mr Wheeler noted that “There is a risk of a housing market resurgence (and a sharp lift in high LVR lending) if LVRs were removed at this time.” 
• The RBNZ still assumes LVRs will be temporary, and noted that their eventual removal could be in stages to limit a potential resurgence in financial stability risks.” 

“The Governor repeated that he thinks the introduction of debt-to-income ratios would be a useful addition to the RBNZ’s macro-prudential toolkit. However, he repeated that the RBNZ would not introduce such limits while the housing market was continuing to moderate. Such an addition to the RBNZ’s toolkit would require sign-off from the Minister of Finance, but political support for this is low.”

“While monetary policy was discussed, we don’t think any of the comments signalled any change in stance from the RBNZ. (The RBNZ’s last policy statement signalled that the OCR is likely to remain at accommodative levels for an extended period.) It is worth noting that the only mention of changing the OCR was: “If growth in the global economy slows, we have some scope to buffer our economy.”

“On inflation the Governor emphasised that much of the low inflation in recent years was related to tradables inflation, which was largely beyond the control of the RBNZ.”

“The speech reiterated the RBNZ’s discomfort with the level of the NZD.

• “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.” This is a repeat of the RBNZ’s comment from its August Monetary Policy Statement” 

“Governor Wheeler will step down as RBNZ governor in September, and will be replaced by current Deputy Governor Grant Spencer for a period of six months. A new permanent Governor will be appointed next year. The delay is due to the timing of New Zealand’s general election, which will take place 23 September – just days before the Governor leaves office.”

“Financial markets reaction

Both the NZD and swap rates fell when the speech was released. However, these decline were reversed relatively quickly.”