“Previously high interest rates, rising unemployment, and a weak housing market continue to weigh on demand,” the report said.
“However, lower borrowing costs and high agricultural export prices are supporting debt serviceability,” it said.
The Reserve Bank said the banks have strong capital and liquidity buffers in place to maintain credit flows even if conditions deteriorate further.
“They also remain profitable, with non-performing loans expected to decline as mortgage rates reprice lower.”
Global equity prices have declined and corporate funding spreads, both domestically and offshore, have widened from low levels, the Reserve Bank noted.
Long-term yields on US government bonds were volatile.
“Trade restrictions are a key risk to New Zealand’s financial stability,” the Reserve Bank said.
“The impact of tariffs on our trading partners is expected to lower demand for our exports.
“Some agricultural industries that have limited scope to divert products from the US to alternative markets are more vulnerable to US tariffs.
“Banks are well placed to handle temporary dislocations in overseas funding markets.
“The direct impact of US tariffs on New Zealand exports could be severe for industries heavily exposed to US demand, although they are only a small part of the overall economy.”
New Zealand’s largest exports to the US are meat, dairy products, and wine.
“US tariffs are also expected to have indirect impacts on New Zealand, by targeting our key trading partners and reducing their growth.
“These indirect impacts of tariffs on our trading partners may carry greater risk to financial stability than direct impacts,” it said.
High export prices have supported cashflow in the dairy sector.
Rising global commodity prices have improved conditions in many parts of the agriculture sector.
Dairy sector
Dairy sector conditions have improved over the past six months as international prices rose to elevated levels.
Fonterra’s farmer suppliers may also benefit from a one-off payment from the cooperative’s sale of its global consumer business, although the timing and size of the payment are uncertain, the bank said.
Lower farm-cost inflation has also eased cashflow pressures.
Improved cashflow will allow dairy farmers to continue to reduce debt and increase their resilience to future downturns.
Household and business demand for credit remains weak despite lower interest rates.
Many borrowers rolling off fixed rates are moving on to floating rates or shorter-term fixed rates, it noted.
These borrowers are waiting for further Official Cash Rate cuts before re-fixing for longer terms. The effective (weighted average) mortgage rate across all borrowers remained close to its peak.
“We expect around 60% of mortgage lending to reprice to lower rates within the next six months, and around 80% within a year,” the bank said.
Progress is continuing on the implementation of the Deposit Takers Act 2023.
The Depositor Compensation Scheme will come into effect on July 1 this year.
The scheme will protect depositors’ funds in the event of a deposit taker failure and is a significant milestone for enhancing trust and competition in the financial system, the bank said.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
