NZ RBNZ Financial Stability Report

A significant focus of this Report is on the financial stability impacts of the conflict in the Middle East. Global events of this nature affect the New Zealand financial system through several key channels, including trade, financial markets and cyber risk. • Trade: Higher oil prices and broader economic impacts, partly driven by elevated uncertainty, can affect the ability of households and businesses to service debt. The sectors most immediately impacted are transport, parts of the primary sector and chemical manufacturing. If ...

Financial stability risks remain higher than in recent years due to global uncertainty and underperformance in parts of the New Zealand economy. Trade tensions present risks to our exporters and have affected business confidence. Persistent weakness in the domestic economy is creating challenging conditions for businesses, exposing banks to credit losses. However, financial stress is not uniform across the economy, with lower interest rates and high agricultural export prices supporting some sectors. Banks also have robust financial buffers to absorb shocks. Global economic fragmentation and policy uncertainty present risks to tradingpartner growth. The outlook for trade relations between the US and China remains uncertain. Many central banks are easing monetary policy in response to projected lower growth and lower inflation. Policy uncertainty and a weaker labour market have contributed to softer economic activity in the US. China’s growth outlook has improved, but risks remain. Investors have also become more concerned about fiscal sustainability risks in the US and some other advanced economies. Recovery in global financial markets masks potential vulnerabilities. Global equity prices have rebounded from their lows RBNZ: FRAGMENTATION OF GLOBAL TRADE AND FINANCE, AND ONGOING UNCERTAINTY CONTINUE TO PRESENT RISKS LOAN DEFAULTS HAVE PICKED UP, ALTHOUGH THEY REMAIN LOW COMPARED TO DURING THE GLOBAL FINANCIAL CRISIS BANKS REMAIN WELL PLACED TO MANAGE THE CURRENT UNCERTAINTY STRONG LENDING…

Financial stability risks have increased over the past six months on the back of global economic uncertainty. The financial system is well placed to support households and businesses. While lower interest rates are reducing debt-servicing costs and easing financial stress for borrowers domestically, risks to global economic growth have increased sharply. The banking sector has significant buffers to continue to provide credit to the economy even if conditions worsen further. The US imposed sweeping tariffs on goods imports from New Zealand and our major trading partners. Trade tensions between the US and other countries have increased. This has caused heightened financial market volatility and could lead to a slowdown in global economic activity. In response, financial markets have priced in more monetary policy easing this year. Global equity prices have declined and corporate funding spreads, both domestically and offshore, have widened from low levels. Long-term yields on US governmen RESERVE BANK OF NZ FSR: RISKS TO THE FINANCIAL SYSTEM HAVE INCREASED OVER THE PAST SIX MONTHS WHILE GLOBAL ECONOMIC ENVIRONMENT HAS BECOME MORE VOLATILE, OUR FINANCIAL INSTITUTIONS ARE IN A STRONG POSITION TO SUPPORT THE ECONOMY BANKS HAVE STRONG CAPITAL AND LIQUIDITY…

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 RBNZ FINANCIAL STABILITY REVIEW: MANY HOUSEHOLDS AND BUSINESSES ARE FEELING FINANCIAL PRESSURE AND RISING UNEMPLOYMENT IS POSING CHALLENGES FOR SOME BORROWERS. RBNZ: BANKS ANTICIPATE A SLIGHT INCREASE IN NON-PERFORMING LOANS, ALBEIT STILL BELOW LEVELS SEEN IN PREVIOUS RECESSIONS 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 NEW ZEALAND'S FINANCIAL SYSTEM REMAINS STRONG: RESERVE BANK OF NZ FSR NZ RESERVE BANK FSR: NOMINAL INCOME INCREASE AIDING HOUSEHOLDS IN TRANSITIONING TO HIGHER INTEREST RATES RESERVE BANK OF NZ FSR: SOME STRUGGLING, CUTTING SPENDING OR EXTENDING REPAYMENT TIMELINES 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. RBNZ: THE FULL IMPACT OF RATE INCREASES GLOBALLY IS STILL TO BE SEEN. 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 ...