Banks and insurers are in a strong position to support the economy, RBNZ official says
New Zealand’s financial system has continued to be resilient in the context of significant global economic challenges, said Reserve Bank of New Zealand Governor Adrian Orr in releasing the May 2022 Financial Stability Report.
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These complex economic and financial challenges include the threat of the COVID-19 pandemic, ongoing disruptions to production and supply chains, such as those currently evident in China, and international travel restrictions and related uncertainty that are contributing to labour shortages and constraining production.
“Russia’s invasion of Ukraine has heightened these challenges, including the significant human impact,” Orr said. “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.”
Meanwhile, rising commodity prices and supply disruptions have driven global inflation above central banks’ target ranges, which in turn, led to 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,” Orr said.
RBNZ said the reopening of borders and easing of COVID-19 restrictions will positively impact the tourism and hospitality sectors in New Zealand, but many businesses will need to be tested as the broad COVID-19 fiscal support ends. Targeted fiscal support remains for the most affected households and businesses.
In New Zealand as in the rest of the world, the central bank said 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 started to decline in November, but still remain 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 while the banking system is well funded and positioned to maintain lending in the event of a downturn, said Christian Hawkesby, RBNZ deputy governor.
“Our actions are safeguarding ongoing economic and financial stability,” Hawkesby said. “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.”
Hawkesby said RBNZ is working collaboratively with the industry and the Council of Financial Regulators on governance, risk management, capital and liquidity.
“By strengthening our supervisory and legislative frameworks, we are investing in our own capability and capacity,” he said. “We are adding to our macroprudential toolkit through the design of a debt-to-income restrictions framework for future use if necessary. In addition, we are continuing to work with the government and industry on longer-term challenges like financial inclusion, climate change, and understanding housing supply constraints.”
Read next: RBNZ to design debt-to-income restrictions
