Finance Minister and RBNZ Governor agree to update MOU on macro-prudential policy


Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr have updated the Memorandum of Understanding (MoU) on macro-prudential policy to further protect the financial system and support the Government’s housing objectives.

“This change will ensure that the Reserve Bank has the flexibility to respond to emerging financial stability risks and deploy appropriate tools as required,” Grant Robertson said.

“I have largely agreed to the Treasury and Reserve Bank’s proposed update to the MOU to add debt serviceability tools, but as I indicated in June this extension should not unduly impact first home buyers. As such, we have agreed further wording in the MOU that states:

  • In the design and implementation of a debt serviceability restriction, the Reserve Bank will need to have regard to avoiding negative impacts, as much as possible, on first home buyers, to the extent consistent with the Bank’s purposes and functions under Part 5 of the Act.”

“I believe this agreed wording will set clear public expectations while maintaining the operational independence of the Reserve Bank. It is still up to the Reserve Bank how it chooses to introduce any restrictions, having had regard to this condition.”

The Reserve Bank has announced its intent to consult on ways to tighten lending standards, citing concern about unsustainable house prices and the risks to financial stability.

It has proposed reducing the amount of lending banks can do above a high Loan-to-Value Ratio (LVR) of 80 percent, from 20 percent to 10 percent of all new loans. Consultation will start with banks later this month, with a view to introduce this from 1 October, 2021.

The Bank also intends to start consultations in October on implementing Debt to Income (DTI) restrictions and/or interest rate floors.

“It’s sensible for the Reserve Bank to consult on lending rules designed to ensure the stability and soundness of the financial system. Under changes introduced earlier this year, the Reserve Bank also has to have regard for the Government’s housing policy to support more sustainable prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.

“It is important to note that any decision to introduce DTIs would only happen after a full public consultation and Regulatory Impact Assessment, which would take a minimum of three months.

“The Government has already put in place a number of measures to cool the housing market to make house prices more sustainable and tilt the balance in favour of first home buyers, including extending the bright-line test and removal of interest deductibility.

“Theses initiatives will make a real difference. However, there is no silver bullet to housing affordability and monetary and fiscal policy need to work together to achieve a sustainable housing market,” Grant Robertson said.