13 Aug 2012

New Reserve Bank powers 'need to be spelt out'

8:45 am on 13 August 2012

The Treasury says new tools to rein in bank lending during property booms need to be spelt out clearly so that future Reserve Bank governors can be held accountable for their use.

In advice to Finance Minister Bill English the Treasury says there is a risk the tools currently being developed by the central bank may be under-utilised if it is not clear when they should be used.

In response to the global financial crisis the Reserve Bank has been working on extra tools to put a brake on bank lending during a property boom. They include restricting the amount trading banks can lend on houses and compelling them to hold more capital.

The Reserve Bank believes that could reduce bad loans and bolster the financial system if the boom turned to a bust. It is more sceptical, however, about their use in managing inflation and the exchange rate.

In advice late last year to Mr English, the Treasury says the tools may mean the Official Cash Rate does not need to be raised by quite as much to keep inflation in check.

But it says there is a risk that the Reserve Bank could be overly conservative in applying the rules, especially if the governor is cautious about their use.

It says a formal framework should be developed so it is clear when the extra powers should be used.