NZ RBNZ Financial Stability Report

The Financial Stability Report outlines our assessment of the state of, and risks to, New Zealand’s financial stability. The Report is one of our key publications, and aims to raise public awareness of developments in the financial system. It is published pursuant to section 170 of the Reserve Bank of New Zealand Act 2021, which states that the Report must: • report on matters relating to the stability of New Zealand’s financial system, and other matters associated with the Reserve Bank’s prudential objective; and • contain the information that is necessary or desirable to allow an assessment to be made of the effectiveness of the Bank’s use of its powers to protect and promote the stability of New Zealand’s financial system, and achieve the prude post: RBNZ FINANCIAL STABILITY REVIEW: MANY HOUSEHOLDS AND BUSINESSES ARE FEELING FINANCIAL PRESSURE AND RISING UNEMPLOYMENT IS POSING CHALLENGES FOR SOME BORROWERS. post: RBNZ: BANKS ANTICIPATE A SLIGHT INCREASE IN NON-PERFORMING LOANS, ALBEIT STILL BELOW LEVELS SEEN IN PREVIOUS RECESSIONS post: RBNZ FINANCIAL STABILITY REVIEW: FINANCIAL SYSTEM REMAINS RESILIENT AMIDST ECONOMIC DOWNTURN.

The Financial Stability Report outlines our assessment of the state of, and risks to, financial stability. The Report is one of our key publications, and aims to raise public awareness of developments in the financial system. It is published pursuant to section 170 of the Reserve Bank of New Zealand Act 2021, which states that the Report must: • report on matters relating to the stability of New Zealand’s financial system, and other matters associated with the Reserve Bank’s prudential objective; and • contain the information that is necessary or desirable to allow an assessment to be made of the effectiveness of the Bank’s use of its powers to protect and promote the stability of New Zealand’s financial system, and achieve the prudential objective. Our prudential objective is to protect and promote the stability of New Zealand’s financial system. Financial stability means having a resilient financial system that can withstand severe but plausible shocks and provide the financial services that we all rely on. This ensures everyone in post: NEW ZEALAND'S FINANCIAL SYSTEM REMAINS STRONG: RESERVE BANK OF NZ FSR post: NZ RESERVE BANK FSR: NOMINAL INCOME INCREASE AIDING HOUSEHOLDS IN TRANSITIONING TO HIGHER INTEREST RATES post: RESERVE BANK OF NZ FSR: SOME STRUGGLING, CUTTING SPENDING OR EXTENDING REPAYMENT TIMELINES post: RISK OF LONG-TERM RESTRICTIVE GLOBAL INTEREST RATES DUE TO PERSISTENT INFLATION PRESSURES: RESERVE BANK OF NEW ZEALAND FSR

Globally, core inflation remains elevated and central banks are expected to keep monetary policy tight for some time. While the global economy’s adjustment to higher interest rates has been relatively benign so far, the full impact is still to be seen and there are several tail risk scenarios. Key global risks in the near term include the possibility that central banks need to tighten monetary policy further, unanticipated impacts from previous tightening, potential spillovers from the current slowdown in the Chinese property market and escalation of the war in the Middle East. • New Zealand households and businesses continue to face higher debt servicing costs. The share of mortgages in arrears is increasing from low levels. Pockets of stress are likely to grow in the medium term as highly-indebted households continue to be tested by higher debt servicing burdens. A key risk to financial stability would be a significant deterioration in the labour market. post: RBNZ: THE FULL IMPACT OF RATE INCREASES GLOBALLY IS STILL TO BE SEEN. post: RBNZ: THE KEY RISK TO FINANCIAL STABILITY WOULD BE A SIGNIFICANT DETERIORATION IN THE LABOR MARKET.

Higher interest rates impact financial stability through numerous channels. In this special topic we assess how financial stability in advanced economies has been affected by the higher interest rate environment. To date, financial systems have been largely resilient to risks emanating from higher interest rates, but the full impact is still to be seen and some areas of concern are emerging. Also in this special topic we compare the effects of higher interest rates on financial stability in other advanced economies with developments ...

Inflation remains high and central banks have continued tightening monetary policy, albeit at a slowing pace Inflation is persisting at levels well above central banks’ policy targets, as the global economy continues to experience fallout from the supply shocks of COVID-19 and Russia’s invasion of Ukraine. The lagged effects on demand of the significant monetary and fiscal stimulus deployed in response to the pandemic are now fading. However, labour markets remain historically tight and high inflation expectations are requiring central banks to continue to raise their policy rates. The pace of tightening is slowing, with central banks evaluating the effects of the cumulative increases in interest rates to date on economic activity, the outlook for inflation, and financial stability. As a result, the upward trend in interest rates has slowed, but volatility remains high given ongoing uncertainty about the speed at which inflation will reduce (figure 1.1) post at 5:01pm: RBNZ - NZ’s Financial System is Well Placed to Handle the Higher Interest Rate Environment and International Financial Disruptions post at 5:02pm: RBNZ: Although Central Banks Have Slowed Pace of Tightening Recently, Full Extent of Impact of Previous Tightening is Still to Be Seen RBNZ: Global Inflation is Persisting at Levels Well Above Central Banks’ Policy Targets post at 5:08pm: RBNZ: NEW ZEALAND'S BANKS ARE NOT MATERIALLY EXPOSED TO THE SAME INTEREST RATE CONCERNS THAT HAVE CONTRIBUTED TO CERTAIN RECENT BANK FAILURES IN THE UNITED STATES.

New Zealand’s financial system remains robust in the context of significant global economic challenges, Governor Adrian Orr says in releasing the May 2022 Financial Stability Report. Globally the COVID-19 pandemic continues to pose complex economic and financial challenges. Ongoing disruptions to production and supply chains, such as those currently evident in China, are wearing on business confidence and adding to input costs. At the same time, international travel restrictions and related uncertainty are contributing to labour shortages and constraining production. “Russia’s invasion of Ukraine has heightened these challenges, including the significant human impact. Trade flows are being severely disrupted by economic sanctions and logistical issues. With Russia and Ukraine being significant global producers of energy and food commodities, this conflict has lifted global commodity prices,” Mr Orr says. Rising commodity prices and supply disruptions have driven global inflation above central banks’ target ranges, prompting a global tightening in monetary conditions and higher longer-term interest rates. “The combination of a global pandemic and war is a significant challenge, but we are confident that the New Zealand financial system is resilient to a range of potential outcomes,” Mr Orr says. In New Zealand, the reopening of borders and easing of COVID-19 restrictions will positively impact the tourism and hospitality sectors. However, many businesses will be tested as the broad COVID-19 fiscal support ends. Targeted fiscal support remains for the most affected households and businesses. Globally, and here in New Zealand, asset prices are coming off their highs as investors have revised up their outlook for longer-term interest rates. In New Zealand, house prices have been declining since November, but still remain elevated above their sustainable level. Banks and insurers are in a strong position to support the economy and provide the financial services we all rely on. Banks remain profitable and well capitalised – the latter in line with our requirements. The banking system is well funded and positioned to maintain lending in the event of a downturn, Deputy Governor Christian Hawkesby says. “Our actions are safeguarding ongoing economic and financial stability. By raising the Official Cash Rate and signalling further tightening to come, the Monetary Policy Committee has acted to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future. Our loan-to-value ratio requirements for mortgage lending have also limited the accumulation of highly leveraged loans, building economic and financial resilience,” Mr Hawkesby says. “We are working collaboratively with the industry and Council of Financial Regulators on governa post at 7:06pm: *RBNZ'S ORR: WE AIM TO HEAD OFF RISING INFLATION EXPECTATIONS *RBNZ'S ORR: MANY BUSINESSES WILL BE TESTED BY RISING COSTS *RBNZ'S ORR: CONFIDENT N.Z. FINANCIAL SYSTEM IS RESILIENT post at 7:08pm: RBNZ'S GOVERNOR ORR: WE CAN'T RULE OUT A WORLDWIDE RECESSION IN THE COMING MONTHS.

Financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient over the longer-term, Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report. International risks to the financial system have increased. Global growth has slowed amid continued uncertainty about the outlook for world trade. This has resulted in reductions in long-term interest rates to historic lows, including in New Zealand. While necessary to maintain near-term inflation and ...