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.

“While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment,” Mr Orr says. “It is important that financial institutions take a long-term view when supporting customers and allocating credit to the wider economy,” Mr Orr says. Global supply chain disruptions, ongoing food and energy supply shocks, scarce labour resources, and the lagged effects of fiscal and monetary policy have all contributed to high inflation. Central banks have rapidly tightened monetary settings to ensure that inflation expectations remain anchored, but the extent to which economic activity will slow remains uncertain. There are increasing downside risks to the global economic outlook. Despite New Zealand’s high levels of employment and a sound government fiscal position, we are not immune to these risks, Deputy Governor Christian Hawkesby says. post at 4:03pm: RBNZ: Some Households and Businesses Will Be Challenged by the Rising Interest Rate Environment RBNZ: There Are Increasing Downside Risks to the Global Economic Outlook RBNZ: Banks' Capital And Liquidity Positions Are Strong post at 4:06pm: RBNZ: THE EXTENT TO WHICH ECONOMIC ACTIVITY WILL SLOW AS A RESULT OF MONETARY POLICY TIGHTENING IS UNKNOWN.

Key points: • There are increasing downside risks to the global economic outlook. Strong and broadening inflationary pressures are leading central banks to tighten monetary policy more aggressively than had previously been anticipated. Financial markets have been increasingly volatile, and there is high uncertainty about the extent to which economic activity will slow in response to the monetary policy tightening. Financial stability risks have increased as a result. • House prices in New Zealand continue to decline as mortgage rates rise. Nationally, prices are down 11 percent from their November 2021 peak, with larger falls in Wellington and Auckland. Negative equity and mortgage servicing arrears are not widespread at present, but will grow if prices continue to fall and as mortgages reprice to higher interest rates. Significantly higher unemployment would lead to further stresses among households, and is the biggest risk to financial stability at present post at 4:13pm: RBNZ: While Resilience of the Financial System Is High Overall, Some Households and Businesses Will Come Under Stress Over the Coming Months RBNZ: Significant Decline in House Prices Remains a Possibility, Which Would Create Challenges for Some Recent Buyers post at 4:14pm: RBNZ: Assessment Is House Prices Remain Above Sustainable Level & That Further Gradual Decline Would Be Positive for Long-Term Financial Stability RBNZ: With Widespread Negative Equity, Banks Would Be More at Risk of Losses if People Can No Longer Afford Their Mortgage post at 4:14pm: RBNZ: Economic Activity To Slow As Households Reduce Their Spending RBNZ: Over Coming Year, Consumption Expected to Slow As Households Face Higher Mortgage Payments and a Decline in Wealth From Falling House Prices