our official cash rate is 1. 75 percent – above the zero and negative policy rates of several advanced country central banks - and the bank has not grossed up its balance sheet by buying domestic assets. similarly, with budget surpluses and low net government debt relative to gdp, the government has flexibility on the fiscal policy side. 5. new zealand ’ s monetary policy framework i ) flexible inflation targeting remains highly relevant flexible inflation targeting was introduced by the rbnz in 1990 and has been adopted by most central banks in the advanced economies and several emerging market economies. 21 with inflation below target in nearly all advanced economies, there have been questions from time to time whether flexible inflation targeting is still an appropriate framework for monetary policy. we believe that it is still the best monetary policy framework for new zealand. it has helped to deliver low inflation while enabling the bank to take account of domestic and external developments in framing its monetary policy responses. no country has abandoned flexible inflation targeting, nor has any country adopted nominal income targeting or price level targeting that are sometimes suggested as alternatives. 22 ii ) maintaining flexibility in specifying the inflation goal central banks make monetary policy decisions by drawing on the data available, research, models, forecasts and judgement. at a technical level it involves estimating potential output, output gaps, and the neutral interest rate, and assessing the transmission mechanisms through which interest rate changes affect output growth and inflation, and the time lags involved. structural changes in the economy can have important effects on factors that are central to monetary policy decision making. we ’ ve seen the relationship between the output gap and inflation change with philips curves flattening across the advanced economies, even in countries with rapid employment growth and low unemployment rates. the fact that the reserve bank has much less control over tradables inflation did not matter as much when the annual percentage change in import prices in world terms was 2. 6 percent in the five years prior to the gfc, but it does when they have averaged minus 1. 4 percent since march 2013. the specification of a target range for cpi inflation should be the main focus of the policy targets agreement ( pta ). it ’ s important that the pta also recognise that several factors can cause inflation to move outside the target range and require the bank to provide analysis and explanations in the monetary policy statement when this occurs. specifying a single inflation rate that the central bank should seek to achieve at all times should be avoided - it suggests a spurious accuracy that central banks are unable

zealand dollar is needed to increase tradables inflation and help deliver more balanced growth. 3. the impact of macro - prudential policy with low interest rates unable to constrain credit growth, rapid house price inflation was creating financial stability risks for the banking system and, given the very high levels of household debt, increasing the risk that a rapid fall in house prices could have a severe economic impact. we were conscious that the introduction of lvr restrictions would make life difficult for the bank, given the sensitivities around housing. loan - to - value ratio restrictions ( lvrs ) reduced the systemic risk to the banking system flowing from the rapid increase in house prices. requiring new borrowers to have a greater equity contribution in their house purchases reduced the overall riskiness of banks ’ mortgage portfolios. when lvrs were introduced in october 2013, 21 percent of the stock of mortgage lending across the banking system was at lvrs of 80 percent or higher. with a third of new mortgage lending at that time taking place at lvrs of 80 percent or higher, the overall stock of high lvr mortgages was likely to approach 25 percent. as a result of the lvr restrictions, the stock of highly leveraged loans across the banks ’ mortgage portfolios is now around 8 percent. figure 1 : lvr policy continues to strengthen bank balance sheets high - lvr share of bank ’ s residential mortgage portfolios introduction of restrictions on high - lvr lending source : registered banks ’ disclosure statements, rbnz lending position survey some commentators expected the lvr restrictions to fall heavily on first home borrowers. while some first home buyers wanting high lvr loans have been affected by the restrictions, banks have given priority to first home buyers within their 10 percent speed limit. figure 3 shows that over the past 2½ years the share of first home buyers in real estate transactions has been around 21 percent - its level in early 2013. over this period, first home buyers have taken out nearly $ 21 billion of mortgage loans from the banking system, with 28 percent of that lending at lvrs greater than 80 percent. figure 2 : share of house sales by buyer - type source : core logic it ’ s encouraging that nation - wide annual house price inflation has fallen from its peak of 21 percent in august 2015 to 1 percent currently ( figure 4 ). several factors contributed to the slowdown including the tightening of investor lvrs in october 2016, more restrictive lending conditions by banks,