6 Jun 2013

Reserve Bank moves to tighten risky loans

5:29 pm on 6 June 2013

The Reserve Bank has released a consultation paper setting out how it might limit mortgage lending to people with small deposits.

The central bank is increasingly worried about rising house prices in Auckland, but remains hesitant about raising interest rates which, in turn, could push up the New Zealand dollar and undermine exporters.

Radio New Zealand's economics correspondent says the paper indicates the Reserve Bank wants to put something in place very soon.

The Reserve Bank has previously suggested its preference is to put restrictions on the amount banks can lend to those with low deposits rather than trying to ban such loans altogether.

It says it wants to be able to apply the restrictions with as little as two weeks' notice to banks and wants them to be prepared for that.

Westpac economist Felix Delbruck says the Reserve Bank is keen to try out such tools and could do so before it moves the Official Cash Rate again.

That could mean any increases in the benchmark interest rate will be delayed while the central bank watches for any impact on lending and the housing market such restrictions might have.

A banking lobby group is relieved that the Reserve Bank has decided against banning risky loans outright. Bankers Association chief executive Kirk Hope says it is the right approach if the central bank insists on imposing limits.

"Certainly the speed limit approach is the preferred option, simply because it allows banks to have the discretion, rather than the cap approach, which is a fairly blunt instrument."

The Reserve Bank is hoping the use of such tools will dampen Auckland's surging property market, but Mr Hope says he does not expect it to significantly affect demand.

Submissions on the consultation paper close in early July.