Governor Graeme Wheeler's last speech offers clues on LVRs

Reserve Bank Governor Graeme Wheeler. 16 August 2016 Bay of Plenty Times Photograph by George Novak

Graeme Wheeler has outlined the criteria for removing Loan to Value Ratio restrictions, suggesting that they be removed in stages, in his last major speech as Reserve Bank Governor.

However, he stopped short of providing a time frame and warned that underlying supply and demand issues with the market remain unresolved.

In his speech - Reflections on the Stewardship of the Reserve Bank - Wheeler deals with several major issues from his five year tenure - including rate hikes in 2014 that subsequently had to be reversed.

Wheeler offers an upbeat assessment of the local economy pointing to stronger GDP and employment growth in the time since the start of 2013 compared to the average across the previous 22 years (since the start of flexible inflation targeting 1990).

Wheeler's reference to eventual roll back of LVRs follows calls from real estate lobby groups and comment from Prime Minister Bill English suggesting that the bank should be considering the timeframe for their removal.

"LVRs are not expected to be a permanent measure and the conditions for their removal would be: signs that financial stability risks have eased; and a degree of confidence that these risks won't worsen again when LVRs are removed," Wheeler said.

The financial risk picture was improving, he said.

Banks were carrying a lower share of high LVR mortgages and the slowdown in house price inflation was positive - although prices remained very elevated relative to incomes and rents.

"However, the underlying drivers of housing demand [population growth, low interest rates] remain strong with housing demand still outstripping supply," he said.

"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 bank will continue to review developments, bearing in mind that removal could be made in stages as a safeguard to a resurgent market."

Wheeler avoided political comment but did reiterate his support for maintaining Consumer Price Index inflation as the main target of policy agreements. Something both the Labour Party and New Zealand First have indicated they may review.

He also offered some explanation for a series of rate hikes in 2014 that subsequently had to be unwound.

"At that time the IMF were forecasting higher global growth and the New Zealand economy was growing rapidly," he said. "We forecast a positive output gap and rising inflationary pressures."

But the global economy did not strengthen as anticipated, oil prices almost halved and whole milk powder prices fell 40 per cent.

"Central banks do not expect to be able to accurately forecast commodity prices," he said.

What mattered was remaining open-minded, assessing new information as it became available and changing forecasts and policy settings when appropriate.

"We are satisfied that the bank met these tests," he said.

In the absence of major shocks, New Zealand's prospects looked promising for continued robust economic growth over the next two years, Wheeler said.

"The greatest risk we face at this stage relates to the inflated global asset prices and the continuing build up in global debt."

He concluded by thanking the Reserve Bank board and his colleagues at the bank.

"The fact that the bank continues to maintain a strong international reputation is due to the high calibre, dedication and commitment of colleagues throughout the institution."

This was Wheeler's last major scheduled speech.

He officially steps down on September 26 and the Reserve Bank points out that he will be on deck and ready to speak publically until that time should major economic events require it.

Deputy governor Grant Spencer will then take up the position for a six month interim term, while the search for a long term replacement continues.