The Reserve Bank said the impact on New Zealand exporters had been limited so far, with many diversifying into new markets.
However, setting up these alternatives takes time, investment and infrastructure. In the short term, this can affect costs and profitability. Longer-term, trade tensions could harm New Zealand.
The Reserve Bank also pointed to the chilling effect the uncertainty was having on economic growth worldwide, but noted the impact of this was being softened by central banks cutting interest rates.
Residential property
While the bank had once seen extremely high house prices and high debt servicing costs as risks, it now believed house prices were near the top of its range of “sustainable estimates”.
It noted house prices remained about 12% below their November 2021 peak, having been broadly flat over the past three years.
The rise in banks’ non-performing home-loan ratios has turned a corner, as lower interest rates make it easier for borrowers to service their debt.
The Reserve Bank didn’t believe the restrictions it imposes on banks’ mortgage lending (including its loan-to-value-ratio restrictions, which it is loosening slightly) were having a big effect on the property market.
However, should house prices start to rise a lot and borrowers seek to take out higher amounts of debt compared to their incomes, new debt-to-income restrictions would act as guardrails, constraining how much lending banks do to highly indebted borrowers.
Equities
The Reserve Bank was concerned about the equity market.
It noted share prices had recovered since the US unveiled details of its tariffs in April, but the improvement masked vulnerabilities.
Indeed, much of the rebound has been driven by large technology and artificial intelligence (AI) firms, whose performance is seen to be insulated from the effects of tariffs and changes in consumer demand.
Equities more exposed to current economic conditions aren’t doing as well.
Furthermore, the price-to-earnings ratios of US equities remain elevated relative to history, leaving markets vulnerable to potential volatility if earnings expectations are not met.
The Reserve Bank also pointed to the increased participation of non-bank financial institutions, such as hedge funds and private credit firms, in financial markets, saying this could increase market volatility during periods of stress.
Bonds
Turning to the bond market, the Reserve Bank noted how investors in US government bonds in particular were demanding higher returns, as they saw the US Government as being more risky with its very large deficit. This, in turn, has put upward pressure on long-term New Zealand government bonds, increasing the cost of borrowing.
The Reserve Bank also noted that as the US Federal Reserve unwinds its Covid-era money-printing programme, the bond market is becoming more reliant on more risk-sensitive private investors.
This may cause sovereign yields to become more responsive to fiscal sustainability concerns over time.
Insurance
On the insurance front, the Reserve Bank noted very strong home, car and contents insurance premium growth had dropped right off as the reinsurance market had softened.
However, health insurance premiums had jumped a massive 19% over the year, as insurers faced high claims costs due to the health system being strained.
The bank said insurers’ solvency positions were above its requirements, but further increases in claims costs could increase firms’ losses and exacerbate financial stress in the system.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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