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July 03, 2018

IMF published its staff report and selected issues report on the 2018 Article IV consultation with New Zealand. Banking sector is strong and banks continue to hold strong capital and liquidity buffers. The IMF Directors noted that macro-prudential policies have contributed to reducing risks to financial stability and should continue to mitigate risks from high household debt. Bank and household balance sheets have become more resilient with a lower share of loans with high loan-to-value ratios (LVRs).

The staff report highlights that macro-prudential policies have contributed to reducing risks to financial stability in the country. After three rounds of tightening of LVR restrictions, the share of outstanding residential mortgages with LVRs above 80% declined to under 8% by September 2017, from 21% in September 2013 prior to the imposition of LVR restrictions. Bank and household balance sheets have become more resilient with this decline. RBNZ relaxed the LVR restrictions marginally as of January 01, 2018 and signaled possible further easing. With household debt still elevated, Directors generally did not see further relaxation of LVR restrictions as appropriate in the near term. 

Last year’s Financial Sector Assessment Program (FSAP) identified an urgent need for strengthening the macro-prudential framework, including by broadening the toolkit to include a debt-to-income (DTI) or debt-service-to-income (DSTI) instrument and the supervisory pillar of New Zealand’s three-pillar approach to banking regulation. Related reforms should be prioritized in the deliberations, implementation, and addition of resources. In context of the second phase of the review of the Reserve Bank Act, Directors encouraged the authorities to emphasize priority areas in need of reform, such as the macro-prudential toolkit and the supervisory pillar, as suggested in the 2017 FSAP.

The selected issues report on New Zealand examines gaps in the infrastructure investment, the backdrop to the revamping of the inflation targeting framework, policy response to housing affordability, and recent productivity performance from a firm-level perspective.

 

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Keywords: Asia Pacific, New Zealand, Banking, Article IV, FSAP, Macro-prudential Policy, Financial Stability, IMF

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