A financial system resilient to increased challenges

New Zealand’s financial system remains robust amid significant global economic challenges, Governor Adrian Orr said in the May 2022 report release
Financial Stability Report.

Globally, the COVID-19 pandemic continues to pose complex economic and financial challenges. Continued disruptions to production and supply chains, such as those currently seen in China, are undermining business confidence and increasing input costs. At the same time, restrictions on international travel and associated uncertainty are contributing to labor shortages and limiting production.

“Russia’s invasion of Ukraine has compounded these challenges, including the significant human impact. Trade flows are severely disrupted by economic sanctions and logistical problems. With Russia and Ukraine being major global producers of energy and food, this conflict has driven up global commodity prices,” Orr said.

Rising commodity prices and supply disruptions pushed global inflation above central bank target ranges, causing global monetary conditions to tighten and long-term interest rates to rise.

“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 said.

In New Zealand, the reopening of borders and the easing of restrictions related to COVID-19 will have a positive impact on the tourism and hospitality sectors. However, many businesses will be tested when the broad COVID-19 tax support ends. Targeted fiscal support remains for the most affected households and businesses.

Globally, and here in New Zealand, asset prices are moving away from their highs as investors have upgraded their outlook for longer-term interest rates. In New Zealand, house prices have been falling since November, but still remain high 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 capitalized, with the latter complying with our requirements. The banking system is well funded and well positioned to sustain lending in the face of a downturn, Deputy Governor Christian Hawkesby said.

“Our actions preserve continued economic and financial stability. By raising the official exchange rate and signaling further tightening to come, the Monetary Policy Committee acted to avoid rising inflation expectations and minimize unnecessary volatility in output, interest rates and the changes in the future. Our loan-to-value ratio requirements for mortgages have also limited the accumulation of highly leveraged loans, bolstering economic and financial resilience,” Hawkesby said.

“We are working 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 skills and capacities. We complete our macroprudential toolbox by designing a framework of debt-to-income ratio restrictions for future use if needed. In addition, we continue to work with government and industry on longer-term challenges such as financial inclusion, climate change and understanding housing supply constraints,” Mr Hawkesby said.

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Don F. Davis