* RBNZ repeats home loan limits in place till late 2014
* RBNZ says limits may be phased out
* High debt levels of some NZ dairy farmers a risk
* Sharp slowdown in China would hurt NZ
(Adds detail, quotes, economist comment, market reaction)
WELLINGTON, May 14 A stretched New Zealand
housing market, debt-laden farmers and a major slowdown in China
remain the major risks to the country's financial system, and
tight lending rules for banks will need to stay in place until
late this year, the central bank said on Wednesday.
The Reserve Bank of New Zealand (RBNZ) said house prices
remain elevated and overvalued in some areas, but six-month-old
restrictions on low deposit lending have had a positive effect
of slowing house price inflation, credit growth and risk.
"The restriction of high-LVR (loan to value ratio) mortgages
appears to be having the desired effect of moderating house
price pressures and reducing the risk of a severe market
correction," RBNZ Deputy Governor Grant Spencer said in the
bank's six-monthly financial stability report.
However, he said it was too early to remove the limits,
which are designed to help reduce the need to raise interest
rates, because of concerns that strong immigration might give
the sector a renewed boost.
"We consider that the earliest date for beginning to remove
the LVR restrictions is likely to be late in the year," Spencer
said, reiterating points made in a speech last week.
He said the LVR limits may be phased out rather than removed
Real estate industry data earlier this week showed prices
nudging up to record levels but the number of sales falling
Overall, the report said New Zealand's financial system was
in its strongest position since the global financial crisis and
that the risks to it had eased since the report last November.
Financial markets were largely unmoved by the report.
The report said New Zealand's banks were in strong financial
shape, with adequate reserves and capital and low levels of bad
loans. However, it highlighted risks from the high debt levels
of a small portion of dairy farmers.
"A reduction in dairy export prices, and any associated fall
in land prices, could place pressure on the more highly
leveraged borrowers in the sector," said Governor Graeme
Wheeler, reiterating comments made last week.
Dairy produce accounts for close to a third of New Zealand's
NZ$50 billion annual export earnings.
The RBNZ said the improvement in the domestic savings rate
and reduction in government debt needed to be sustained to
constrain the country's high external debt levels, as seen in
the current account deficits.
A sharp slowdown in the Chinese economy, the United States'
move to tighten monetary policy, and any emerging market
volatility were noted as significant external risks.
The RBNZ said it expected its rate-tightening policy, which
started in March, to have more impact, more quickly because a
large number of house loans would be up for renewal over the
However, Wheeler said the RBNZ was "feeling its way through"
its interest rate policy, the impact it might have on housing,
and what factors it would take into account when setting rates.
The RBNZ has lifted its cash rate by 50 basis points over
its past two meetings to 3.0 percent, and it is expected to
raise by another 25 basis points in June, after which it is seen
as possibly pausing for several months because of a high
exchange rate and restrained inflation pressures.
The RBNZ said it would also do a "stocktake" of its banking
and finance company rules to look for improvements.
Analysts said Wednesday's report offered few fresh
indications on the RBNZ's monetary tightening outlook, while
early signs of higher house prices would keep the central bank
vigilant on inflation pressures.
"The report reiterates that housing and dairy are the
financial risks that New Zealand faces along with its high net
external liabilities," UBS senior economist Robin Clements said.
"There's been talk that the Reserve Bank might be not far
from a pause (in rate rises) ... but if house price momentum is
turning up, then why would they pause? It doesn't seem to add
UBS expects the RBNZ will raise rates by 25 basis points at
its next three meetings, in June, July and September, before
(Reporting by Gyles Beckford and Naomi Tajitsu; Editing by