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 governance, risk management, capital and liquidity. By strengthening our supervisory and legislative frameworks, we are investing in our own capability and capacity. We are adding to our macro-prudential 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,” Mr Hawkesby says.