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2017 | OriginalPaper | Chapter

20. Loan-to-Value Ratios, Contractionary Monetary Policy and Inflation Expectations

Authors : Nombulelo Gumata, Eliphas Ndou

Published in: Bank Credit Extension and Real Economic Activity in South Africa

Publisher: Springer International Publishing

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Abstract

• Discern the nature of the interaction between LTVs and the repo rate since 2001
• Assess the extent to which the tight (loose) LTVs reinforce (neutralize) the contractionary (accommodative) monetary policy stance
• Analyze whether the transmission of the LTV shocks occur through the same channels that are impacted by a tight (accommodative) monetary policy shock
• Examine the impact of the repo rate and LTV shocks on household balance sheets
• Assess the response of LTVs to an unexpected positive current inflation expectations shock and inflation
• Assess how deterioration in the inflation outlook leads to the LTV tightening
• Understand the impact of LTV tightening shocks on price stability

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previous chapter The National Credit Act, Monetary Policy and Credit Growth

next chapter Repayment-to-Income and Loan-to-Value Ratios Shocks on the Housing Market

Regulations on LTVs and RTIs are essentially macro-prudential policy measures targeted at lending standards on the system as a whole throughout the credit cycle. They aim to enhance the stability of the financial system to future shocks. They are complementary tools to existing micro-prudential supervision and to banks’ own internal risk management practices, such as credit assessment policies and procedures dealing with different aspects of credit risk associated with the borrower. Other countries also intensify the rate and duration of amortization as a tool aimed at reducing indebtedness (Central Bank of Ireland and Sveriges Riksbank 2015).

IMF (2013) shows that of the macro-prudential instruments to address real estate booms, the most widely used tool is the limit on LTV ratios, followed by sectoral capital requirements and RTI caps or a combination of LTV and RTI limits. Furthermore, evidence shows that although these instruments are not typically aimed at house price growth, they have modest and lagged effects on house price growth.

The distribution of the LTVs has an impact on the sensitivity of households to changes in interests. As the LTV thresholds progressively increase, the interest rate costs and sensitivities increase.

Nonetheless, it is possible that such aspects fall within the remit of the National Credit Regulator.

To determine the response of the inflation rate, we use a model that includes GDP, inflation rate, repo rate and LTV. The model has two lags and 2,000 draws. The results were robust to different orderings.

A Macro-Prudential Policy Framework for Ireland. Bank of Ireland (2014). http://www.centralbank.ie/stability/Documents/FINAL-for%20publication-macro-prudential%20framework.pdf

Address by Deputy Governor (Central Banking), Stefan Gerlach to the Society of Chartered Surveyors Ireland. 15 October 2015. https://www.centralbank.ie/press-area/speeches%5CPages%5CSGerlachSCSI.aspx

Ferrero, A. (2012). House price booms, current account deficits, and low interest rates (Staff reports 541). Federal Reserve Bank of New York. https://www.newyorkfed.org/research/staff_reports/sr541.html

Ferrero, A. (2015). House price booms, current account deficits, and low interest rates. Journal of Money, Credit and Banking, 47(S1), 261–293. 03.CrossRef

IMF. (2013). The interaction of monetary and macroprudential policies. IMF.

McCarthy, Y., & McQuinn, K. (2013). Credit conditions in a boom and bust property market (Central Bank of Ireland Research technical paper 8/RT/13). Dublin: Central Bank of Ireland.

Mester, L. J. (2014). Inflation and monetary policy: Six research questions, speech at inflation conference on: Inflation, monetary policy, and the public. Cleveland: The Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/newsroom-and-events/speeches/sp-20140529-inflation-and-monetary-policy-six-research-questions.aspx

Sveriges Riksbank Financial Stability Report. (2015). Household debt demands further measures. http://www.riksbank.se/en/Financial-stability/Swedish-major-banks-currently-financially-strong/Earlier-Financial-Stability-Reports/2015/Financial-stability-report-20151/

Title: Loan-to-Value Ratios, Contractionary Monetary Policy and Inflation Expectations
Authors: Nombulelo Gumata
Eliphas Ndou
Publisher: Springer International Publishing
Book: Bank Credit Extension and Real Economic Activity in South Africa
Print ISBN: 978-3-319-43550-3

Electronic ISBN: 978-3-319-43551-0

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-43551-0_20