the lvr policy has informed each adjustment in its calibration. the good news is that declining risks have allowed us to ease the lvr restrictions, starting in 2017. the outlook for macroprudential policy we left the lvr policy unchanged in the may financial stability report, in order to monitor the effect of our recent easing and the recent fall in mortgage rates. looking ahead, we are comfortable with further easing in the lvr policy over time, but this is predicated on risks continuing to abate. specifically, we want to see household debt levels remaining stable relative to incomes, prudent lending standards from banks, and moderate house price inflation. if these conditions are met, we are inclined to continue easing the restrictions. in the long term, we face a choice between removing the lvr restrictions and maintaining a permissive setting. a full removal would of course eliminate any efficiency cost, and could be done alongside the deployment of a less intrusive tool if we are still worried about residual risks. but on the flip side a permanent lvr setting will continue to guard against the very risky forms of lending, and may better prepare the banking system to adapt to a more restrictive calibration if risks reemerge. the efficacy of a permanent lvr setting is an important policy question for future research. as you may know, the reserve bank has proposed a material increase to banks ’ capital requirements to increase the resilience of the financial system. the proposals include a more prominent role for the counter - cyclical buffer, providing more certainty that this buffer will be built prior to a downturn in the financial cycle, in order to support lending during a systemic crisis. 13 as a consequence, macroprudential tools, including the lvr restrictions, may need to be used less actively. that said, the counter cyclical buffer would be released during a systemic downturn to support lending. in contrast, it is unlikely that easing lvrs during a downturn would have the same benefit, as banks will be reluctant to undertake high - lvr lending when under stress. different tools are effective for addressing different risks, and there will still be a role for borrowerbased tools to more directly address risks associated with household debt. part 4 – conclusion in conclusion, financial stability is important for the wellbeing of new zealanders, and macroprudential policy is a key line of defence for safeguarding financial stability. baseline prudential tools ensure that potential threats

. the narrower dow index is less than 5 per cent below its all - time high. in japan, the prospect of a new political determination to deal with the problems which have beset that economy for more than a decade has improved sentiment, and the nikkei stock index is well up from the low point reached in the middle of march this year. in australia, it has been pointed out that the modest fall in gdp in the fourth quarter was mainly the result of a very sharp fall - off in the construction sector following the introduction of gst in mid - year, with most of the rest of the australian economy continuing to grow at an annual rate of around 4 per cent. although not too much should be made of it at this relatively early stage, consensus forecasts for our 14 major export markets suggest growth next year of 3. 6 per cent, well up from the 2. 3 per cent expected for the same markets this year. if we eased policy too much now, and that easing had its biggest effect next year, as we expect, we might find that policy would be stimulating the economy at the very time that the world economy was picking up. new zealand's export prices continue to hold up secondly, and contrary to much past experience, the slowdown in the world economy which has occurred to date has not had an obviously negative effect on the world prices of many of new zealand's exports. of course, the prices of some exports have been seriously affected. the world price of our seafood exports is well down over the last year for example. but many other prices have held up well, and that has been particularly true of major exports such as meat and dairy products ( both up by more than 22 per cent in world price terms in the 12 months to april ). in aggregate, the world price of new zealand's commodity exports rose almost 14 per cent in the year to april 2001, and almost 23 per cent over the two years to april 2001. this means that an important channel through which weakness in the world economy typically affects new zealand has so far, on this occasion, been blocked. the new zealand dollar is sheltering the economy from foreign chills thirdly, as we assess the impact of the relatively subdued world economy on the new zealand economy, and therefore on new zealand inflation, we have to assess also the impact which the new zealand exchange rate is having on the situation. if, as is possible, the world economy slows further, and if, as