Feb. 27 (Bloomberg) -- New Zealand’s government expects to agree on how the central bank will be able to curb lending during periods of excessive credit growth by the middle of the year, Finance Minister Bill English said.
“The Reserve Bank and Treasury will finalize arrangements and I expect to sign a memorandum of understanding with Reserve Bank Governor Graeme Wheeler by the middle of this year,” English said in the text of a speech in Auckland. The central bank will publish a consultation document next month, he said.
New Zealand is exploring the introduction of tools to curb lending and protect financial system stability when credit growth surges. The policies, which will focus on bank balance sheets and lending ratios, mean the central bank needn’t rely on interest rate rises alone to curb a credit boom, at a time when the local currency’s strength is hurting exporters.
“Under these proposals, the Reserve Bank will have a greater ability to influence the amount of lending done by banks and other financial institutions,” English said. “We want to avoid a strong upswing in asset values and any unsustainable growth in borrowing well in excess of economic growth.”
Lenders may be required to hold additional capital on their balance sheets as a buffer during an economy wide credit boom, or against loans in specific sectors, he said. They may need to adjust their funding ratios to use more stable sources of money and may be asked to restrict high loan-to-value ratio lending in the housing sector, he said.
The policies “are not a replacement for interest rates as the principal tool of monetary policy, although the two policy frameworks will interact,” he said. “In the same way the Reserve Bank takes into account government tax and spending policy in setting interest rates, the bank will also take into account any effect of using these tools.”
The Reserve Bank will also make decisions about the use of these tools independently from government, just as it makes its decisions on interest rates, English said.
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