RBNZ Governor supports macro-prudential policy   16 Mar 2018

Macro-prudential policy has been particularly useful in the current environment of globally low interest rates, where monetary policy has been unable to counter the strong housing cycle of recent years,” Reserve Bank Governor Grant Spencer said today to an Auckland event hosted by INFINZ.

In his speech, titled Getting the best out of macro-prudential policy, Mr Spencer said it was almost five years since macro-prudential policy was introduced in the form of LVR restrictions, and now is the right time to review the policy.

“A review, which has been scheduled since macro-prudential policy was introduced will now be conducted jointly with the Treasury as part of the Government’s broader review of the Reserve Bank of New Zealand Act. It is timely to consider ways in which macro-prudential policy may be improved, including through a clearer articulation of the governance structure and greater transparency and understanding. I am keen to see macro-prudential continue to develop as a credible and sustainable policy over the longer term.”

Mr Spencer stressed that the views in the speech are his own rather than a formal Reserve Bank position. He said LVR restrictions have helped the Reserve Bank achieve economic and financial stability objectives by reducing housing-related risk in the banking system.

“I believe that the review should look at whether we have the most appropriate macro-prudential framework for New Zealand circumstances, and what role other macro-prudential instruments could play to enhance and/or complement LVR restrictions.

“We need to ask if the governance structure is sensible too. There are diverse views around these questions” he said.

“While having limited scope to sustainably influence credit and asset price cycles, macro-prudential policy has significantly improved the resilience of banks’ balance sheets to any downturn in the housing market. Some key lessons from our own and international experience are that macro-prudential must be modest in its ambitions and always have a prudential rationale.  Macro-prudential policy ultimately can’t control the housing cycle.  It must be applied consistently and backed by sound analysis, with transparent reporting that facilitates accountability.

“A more systematic approach to policy adjustments, and the integration of a clear governance structure into the Reserve Bank Act, including potentially a new decision-making Financial Policy Committee, should assist in putting macro-prudential policy on a sound footing for the future.”

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