UPDATE 2-RBNZ says financial system faces less risk, house prices on its radar

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WELLINGTON, May 31 (Reuters) - The Reserve Bank of New Zealand said on Wednesday that major risks both at home and abroad had eased in recent months, but cautioned that it remained wary about any pick-up in house prices or rise in global protectionism.

While the global economic outlook had improved and domestic house price growth slowed, global political uncertainty remained high and the rate of housebuilding was insufficient to meet demand, the RBNZ said in its half-yearly Financial Stability Report.

The central bank said it would soon release a consultation paper proposing the addition of restrictions on high debt to income loans into its macroprudential arsenal to combat the risk of a sharp downturn in house prices. It said it had no immediate plans to use the debt to income restrictions even if they became available.

"The Reserve Bank would not apply it at this stage, given that LVR (loan-to-value ratio) restrictions appear to be mitigating housing risks," the RBNZ said in its report.

"Should high house price growth return and the proportion of housing lending at high DTI ratios remains high, a DTI restriction could be warranted."

The New Zealand dollar was largely unchanged on Wednesday, inching down to $0.7092 after the release from near three-month highs of $0.7097.

New Zealands housing market has grown in value more than 50 percent in the last decade, leaving the central bank worried about high mortgage debt and the risk that a sudden downturn would pose to banks and households.

But price growth has eased in recent months and some economists say such restrictions are some way off and may never even materialize.

"We dont think there will be a case for applying DTI limits any time soon," Michael Gordon, economist at Westpac said.

"The housing market has slowed significantly as mortgage rates have risen from their lows, and our view is that the slowdown will 'stick' this time."

The central bank reiterated that pockets of the dairy sector were overly-indebted, and that global political uncertainty remained a risk for its financial system.

"Rising protectionism could also affect the trade-exposed sectors of the New Zealand economy," RBNZ Governor Graeme Wheeler said in the report.

The RBNZ has been vocal about how rising protectionism globally is a key risk to New Zealands small, open economy, which is heavily dependent on trade. At a speech in March, Wheeler flagged new U.S. President Donald Trumps America First policy as the greatest source of uncertainty. (Reporting by Ana Nicolaci da Costa and Charlotte Greenfield; editing by Diane Craft)