Reserve Bank of New Zealand Governor Alan Bollard says new liquidity rules for lenders, which come into effect in April, will restrict their access to cheap wholesale funding, helping damp credit growth and reducing the need to hike interest rates to cool the economy.
"We believe that the new liquidity policy, and in particular the core funding ratio, could usefully contribute to the monetary policy task by limiting the banks' ability to fuel credit growth using cheap and plentiful short-term wholesale funding during boom times," Bollard told employers in a speech in Christchurch.
The ratio could automatically stabilise the economy in upturns, and "reduce the required hikes in the OCR" during these periods, he said.
Under the changes, lenders must maintain a core funding ratio of 75 per cent - that's the retail deposit base and longer-term wholesale funding as a percentage of assets.
According to central bank reports, the nation's banks have had an "unusually high" proportion of their international debt securities maturing within one year compared with other developed countries.
The core funding ratio is designed to ensure a higher proportion of stable funding, and a reduced reliance on short-term offshore funding, according to the RBNZ.
The financial crisis highlighted the vulnerability of the New Zealand banking system to a severe global liquidity shock, drying up the availability of short-term fund globally.
Bollard is expected to begin hiking the official cash rate in April, according to a Reuters survey, after he held rates at a record-low 2.5 per cent yesterday, even as he played down his earlier pessimism over the exchange rate and dwindling exports from previous statements.
Bollard repeated his plea to policy makers to cut back on government spending, saying the removal of fiscal stimulus would ease the pressure on monetary policy, and also called for action on the country's tax structure.
Prime Minister John Key has promised an overhaul of the tax system in New Zealand, saying he wants it to be "world class," but has been coy on what initiatives he will introduce to achieve this.
Bollard said he wants to "minimise tax-fuelled property investment and consumption that might detract from more balanced savings and growth" - two things he's pegged as vital for the economy to achieve sustainable growth after it dragged itself out of its worst recession since 1991 last year.
Bollard said he had problems reining in the property market before, which was "exacerbated by a tax system which favoured investment in housing." House values recovered much of their value last year after tumbling in 2008 from a peak a year earlier.
Still, economists predict this has been overstated, with vendor sales and mortgage approvals weak, while the number of new building consents issued last month fell a seasonally adjusted 1.4 per cent, according to government data.
Read Alan Bollard's speech here