UPDATED 3.05pm The Reserve Bank is asking the Government for permission to use a new tool to combat house price inflation.

LISTEN ABOVE: Bill English talks to Larry Williams

In its Financial Stability Report, the Bank confirms it wants to use debt-to-income ratios, a measure that would limit what people could borrow relative to their income.

Governor Graeme Wheeler said they're not proposing to use the tool at this time, but he's signalling they want it in reserve, just in case.

"Restrictions on high DTI lending could be warranted if housing market imbalances were to deteriorate further."

Finance Minister Bill English said the Government has to think about how it would impact on the population and any wider economic costs.

He said it's possible the tool won't be given.

Mr English said it's a fairly significant tool which hasn't been used here before so they want to consider it seriously.

Mr Wheeler said they've had a couple of discussions with the Mr English about it in the last two to three months.

He said the minister's asked for further information about the policy problems it addresses, the circumstances where it'd be used, who would be affected, and how it would fit in with loan to value ratios.

Mr Wheeler said another meeting's scheduled in a few weeks time and they hope to get further clarification then.

Prime Minister John Key told reporters Mr English would consider anything the Reserve Bank governor put in front of him.

"I'm not sure whether he has formed the view or seen enough yet to consider whether he would do that (introduce DTIs)," Mr Key said.

"The tools the governor has seem to be working quite well, whether there's a need to extend that to any further tools is something we want to take some advice on."

New Zealand would join Ireland, the UK, Canada and Hong Kong in adopting a DTI limit.

The stability report concluded that New Zealand's financial system is sound but said there were risks from dairy debt levels and it was still assessing the impact of the Kaikoura earthquake.

There's less doom and gloom for the dairy sector in the latest Reserve Bank report.

The sector, its debt, and low milk prices, have been a consistent theme in the Bank's reports over the past two years.

But Mr Wheeler said dairy prices have recovered in recent months, and the average dairy farm is now expected to return to profitability this season.

However he still has words of caution, saying the sector's debt has increased as farms have absorbed losses, leaving the sector vulnerable to future shocks.

Additional reporting NZ Newswire