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NZ dollar, interest rates falls after RBNZ details LVR restrictions

Tuesday 20th August 2013

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The New Zealand dollar fell about half a US cent and interest rates dropped after Reserve Bank governor Graeme Wheeler detailed the bank's plans to curb high loan-to-value home lending, which could potentially slow the pace of hikes to the official cash rate.

The kiwi dollar fell as low as 79.76 US cents, and recently traded at 7992 cents, from 80.34 cents before the announcement. The trade-weighted index fell to 75.21 from 75.60. The two-year swap rate fell 5 basis points to 3.435.

The central bank will limit the amount of new lending banks can do on high LVR to 10 percent on Oct. 1, measured as an average over a six-month transition period, Wheeler said in a speech at Otago University in Dunedin.

Allowing for exemptions, that effectively means new home lending with deposits of less than a fifth of a property's value will amount to about 15 percent of new loans, half the volume of high LVR loans banks were making at the start of this year.

The introduction of the new limits will give the central bank "greater flexibility in considering the timing and magnitude of any future increases in the OCR" which is sitting at a record-low 2.5 percent, Wheeler said.

"The 10 percent speed limit on the high LVR lending was a little bit lower than people thought," David Croy, head of Global Markets Research at ANZ New Zealand. "It is a tighter macro-prudential policy, which means there is less pressure on monetary policy to do the work."

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