conflict when the real and financial cycles are in opposite phases. while lvrs have a financial stability goal, they have been an important consideration in our monetary policy assessment. we believe the dampening impact of lvrs on house price inflation and credit, and the diminished “ wealth effects ” on spending associated with it, have reduced consumer price inflation pressures by an amount similar to a 25 – 50 basis point increase in the ocr. in essence, the reduction in housing pressures allowed us to delay the tightening in interest rates, thereby reducing the incentive for any additional capital inflows into the new zealand dollar in search of higher yields. we have seen little financial sector disintermediation to date, and have indicated that the lvr speed limit is not intended to be permanent. it will be removed once housing market pressures have moderated and when we are confident there will not be a resurgence in bis central bankers ’ speeches house price inflation. we will be reviewing these criteria and their implications for lvr restrictions in next month ’ s financial stability report. my final comment is on liquidity risk liquidity risk and rollover risk are often the two major financial shocks that hit economies, and especially smaller economies, during episodes of financial market contagion. unsurprisingly, given current yield curves, debt issuance almost everywhere has shifted towards longer - term funding. we still have much to learn around liquidity risk and the emergence of “ black holes ” in funding and asset markets. liquidity risk is a key concern for countries with large external borrowing needs, especially if investors become skittish, trading volumes begin to thin and some price gapping occurs. left unabated, liquidity problems can mutate into solvency problems. the reserve bank introduced a prudential liquidity policy in april 2010. this policy includes minimum liquid asset requirements, and a minimum core funding ratio. like the basel iii net stable funding requirement scheduled for 2018, the policy requires a minimum proportion of total lending to be funded by more stable “ core funding ” instruments such as retail deposits and long term borrowing ( beyond one year ). in new zealand, the commercial banks ’ core funding ratios fell to around 60 percent prior to the gfc. today the banks ’ core funding ratios stand at around 85 percent ( against a minimum of 75 percent ) and the vulnerability of new zealand banks to developments in offshore wholesale funding markets has been substantially diminished. concluding comments one of the eight lucky signs of buddhist philosophy, dr

strong housing demand can add to financial stability risks, especially when accompanied by high household indebtedness. housing market exuberance can be particularly problematic when interest rate responses are not warranted because economic growth is well below potential, and inflation in factor and product markets is benign. macro - prudential policies can be helpful in addressing financial stability concerns in such circumstances. but the introduction of macro - prudential policy requires policy makers to be clear about its goals, the duration of the measures, and how such measures might interact with monetary policy. the reserve bank introduced macro - prudential policy in the form of speed limits on loan - tovalue ratios ( lvrs ) in the residential housing market, on 1 october 2013. house prices – which were already significantly overvalued based on historical and international indicators – were accelerating rapidly in our two largest cities ( that account for around half of the national market ). in addition, household debt was at high levels, and banks were competing aggressively for mortgage lending to borrowers with small deposits. at the time, annual consumer price inflation was running at 0. 7 percent, the exchange rate was strong, and the economy had a negative output gap. it was not appropriate to raise interest rates, but the potential for further rapid house price inflation was considerable as sizeable supply - demand imbalances seemed likely to continue for several years. we introduced a requirement that banks reduce their high lvr lending ( defined as lvrs over 80 percent ) to an average of no more than 10 percent of their mortgage commitments, and made this a condition of bank registration. the measure led to a significant reduction in high - lvr lending, a decline in house sales, and fall in house price inflation. while other factors, such as subsequent interest rate increases over the period march 2014 to july 2014 are also helping to constrain demand, annual house price inflation fell from around 10 percent to 5 percent currently, despite high levels of net immigration. we established clear and separate primary objectives for monetary policy and macroprudential policy. these primary objectives are price stability and financial system stability respectively. there is an appropriate role for coordinating the use of monetary policy and a macroprudential policy instruments provided they both affect outcomes relevant to the achievement of both policy objectives. this condition is likely to be met when the real and financial cycles are in sync and each policy can allow for the complementary effects of the other. the two policies will be in greatest potential