improvements that ensure competitiveness are products of “ real ” advances in efficiency, technology and management. lowering the exchange rate makes no one more efficient. • the focus of monetary policy on the single objective of price stability is key to convincing savers and investors that, in taking their decisions, they do not need to factor in a large inflation risk. it is only in that way that we can get sustainably lower interest rates. • as our own history well demonstrates, any short - term gains that may be available to exporters as a result of a one - off depreciation of the exchange rate are quickly eroded as future inflation increases. as a fix for competitiveness problems, exchange rate depreciations are both addictive and ultimately destructive. • central banks do not determine real exchange rates in the long term. markets and relative economic efficiency / productivity trends determine real exchange rates. what of the balance of payments deficit? let me touch on one other issue that is relevant to the longer - term behaviour of the new zealand dollar and new zealand interest rates - - the balance of payments. we are currently running a current account deficit of the order of 6 percent of gdp. that puts us amongst the largest external deficits in the oecd. note also that new zealand ’ s net foreign debt currently amounts to around 80 percent of gdp - - which puts us at the top end of international experience. to prevent that external debt ratio from increasing further, it is necessary for the current account deficit to decrease to less than the annual growth of gdp - - ie, to something less than about 3 percent. the key issue here is domestic savings behaviour. to the extent that domestic savings are insufficient to fund the nation ’ s investment needs, we must rely on foreign savings. and if we are reliant on foreign savings, we must, by definition, continue to run a current account deficit. that is a simple accounting identity. i note with interest the estimates of some commentators who suggest that the forestry industry alone will require substantial volumes of foreign investment over the next few years. they may be correct in their estimates of investment needs. but if those needs are met from foreign investment, we must accept that that is equivalent to saying that new zealand must continue to run a current account deficit. will new zealand generally, and the forestry sector in particular, have difficulty attracting the investment capital it requires? probably not. so long as investors have confidence in the quality of our industries, the reliability of future earning streams

for the lender. a restriction on the volume of high lvr loans should reduce the inherent risk in banks ’ mortgage portfolios as well as reducing the overall supply of credit to the housing market. the international evidence suggests that a prevalence of high lvr lending can accentuate loan losses and worsen economic disruption when inflated house prices correct abruptly. two examples are the united states and ireland. while lending practices in these countries were far more extreme than we have seen in new zealand, their experiences are instructive. in both countries, house price appreciation was fuelled by competition between lenders, and falling lending standards. by 2006, 20 percent of new mortgage lending in the united states was sub - prime, often with minimal credit checks and very high lvrs. similarly in ireland, lending was often occurring at lvrs over 100 percent. annualised house price growth peaked at 16 per cent and 15 per cent in the us and ireland in the lead up to the gfc before falling sharply. the subsequent sharp downturns gave rise to considerable financial distress in both countries, with high lvr borrowers particularly hard hit. at the bottom of the us housing market in 2010 / 11, around 25 percent of the 50 million or so mortgage holders had loans larger than the value of their houses. in new zealand, losses from housing loans in the wake of the gfc were well contained compared to many countries, although there was an increase in defaults. the reserve bank recently analysed data on banks ’ loss rates, by lvr category, over the period from 2008 to 2012. the increase in loss rates followed a fall in nominal house prices of around 10 percent from their peak in 2007. while there was some variation across banks, the data shows that loss rates on high - lvr loans generally increased more ( and in several cases substantially more ) than loss rates on lower lvr loans. this evidence of high and correlated loss rates supports the proposition that higher lvr loans have more systemic risk than lower lvr loans. it is on this basis that the reserve bank recently took the ( micro - prudential ) measure of increasing high lvr risk weights on the housing exposures of the major banks ( rbnz, 2013c ). bis central bankers ’ speeches a number of countries have applied lvr restrictions over the past few years, including canada, sweden, norway, israel, korea and hong kong sar. in the case of sweden and norway, the lvr restrictions are