grant spencer : getting the best out of macro - prudential policy speech by mr grant spencer, deputy governor of the reserve bank of new zealand, to infinz, auckland, 13 march 2018. * * * introduction it is five years since we first introduced macro - prudential policy in the form of loan - to - value ratio ( lvr ) restrictions in october 2013. it is time now to take a step back and review the experience with this new policy framework. indeed we are committed to undertake such a review under the memorandum of understanding ( mou ) on macro - prudential policy that was signed with the minister of finance in 2013. the review will be undertaken jointly with treasury as part of the government ’ s broader review of the reserve bank of new zealand act. you will hear a wide range of views on the lvrs from a number of perspectives – some favourable and some less so. from the reserve bank ’ s perspective, the lvrs have assisted us in achieving our economic and financial stability objectives. the lvrs have reduced housingrelated risk in the banking system and also helped to ease housing market pressures. the policy has been particularly useful in the current environment of globally low interest rates, where domestic monetary policy has been unable to counter the strong housing cycle of recent years. but do we have the most appropriate macro - prudential framework for our circumstances in new zealand? what role could the other instruments in our toolkit play to enhance and / or complement the lvrs? should we be considering other macro - prudential instruments? is the governance structure sensible? there are diverse views on these questions. with the review of the macro - prudential framework ahead of us, my intention today is to consider the key issues that might be addressed and to offer some thoughts, based on our experience, for options to improve the policy framework. i have been closely involved in the reserve bank ’ s development and implementation of macro - prudential policy and i am keen to see macroprudential policy continue to develop as a credible and sustainable policy over the longer term. i will first discuss the new zealand and international experience with macro - prudential policy, and some of the lessons we have learned. i will then make some observations and suggestions aimed at putting macro - prudential policy on a more systematic and sustainable footing. these are my own views and are not a formal reserve bank position. the new zealand experience as set out in

of the gap in our per capita income compared to the oecd average. but this is not the whole story. despite our high international rankings in key areas, the latest world economic forum ’ s global competitiveness report ranks new zealand ’ s overall competitiveness at 25th out of 142 countries. besides market size, we perform poorly on our macroeconomic environment, and especially on our budget deficit and low national savings. but regulatory and performance - related factors also diminish our growth potential. many of the remedies to substantially improve our ranking lie in our own hands, and groups such as the 2025 task force, the savings working group, and the productivity commission, emphasised reforms that can raise our living standards. three areas seem particularly important. the first, is to raise our level of saving and investment, and improve the quality and productivity of our investment. in 2007, the world bank analysed the stylised characteristics of the 13 economies that had grown at an average rate of seven percent per annum or more for a 25 year period since the 1950s. eight of the countries were in asia. 1 we share many of the characteristics of these countries in terms of openness of the economy, macroeconomic stability, and market based resource allocation. one key difference however, is that all these countries had savings and investment ratios in excess of 25 percent of gdp and often over 30 percent. over the past three decades our net national savings rate averaged only three percent of gdp – almost five percentage points below the oecd median. for the past 25 years, our net household savings as a percentage of household disposable income averaged minus two and a quarter percent – the lowest in the oecd ( where data are available ), and 10 percentage points below the oecd median. our desire for such high levels of consumption was met by borrowing the savings of foreigners. as a consequence, our net foreign liability position is 73 percent of gdp, one of the highest ratios in the oecd, and not much different from some countries that have been at the centre of the financial crisis in the euro area. the build - up in external debt increases our vulnerability to economic shocks and the high propensity of new zealanders to borrow means that higher interest rates than elsewhere are required to achieve similar inflation outcomes. the growth report, strategies for sustained growth and inclusive development. bis central bankers ’ speeches although, our national savings ratio is low, our investment rate over the past three decades