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RBNZ concerned banks more lenient in lending

RBNZ concerned that banks are becoming more lenient in their lending practices

The RBNZ today delivered its six-monthly Financial Stability Review. The Review highlighted that global economic and financial market conditions have improved, but remain fragile, and that New Zealand’s economy had “turned a corner.” Strong NZD continues to curb the competitiveness of Kiwi exporters, however, and hampers the re-balancing of economic growth away from domestic consumption, an adjustment the RBNZ long has reiterated is needed to promote a sustainable economic recovery. Some rebalancing in the economy does appear to have occurred over the past year, with the current account deficit narrowing, but NZD strength could hinder further improvement in the nation’s external imbalance.

The main concern for the RBNZ remains the prospect of another debt-fuelled household spending spree. Indeed, according to the RBNZ, the recent lift in housing market activity has increased the risk that consumers may revert to their old borrow-to-spend habits. House prices, though, have been inflated by fewer listings in the market, a lack of supply exacerbated by strong net migration flows. The recent recovery in the housing market will be limited according to the RBNZ, owing to rising unemployment and, eventually, higher interest rates, which will put stress on those who entered the market in a low interest rate environment. Non-performing loans already have increased over the last year, with the ratio of NPLs to total lending rising 0.5%-points to 1.5%, a ratio the RBNZ suggested will not peak until mid-to-late 2010.

Household balance sheets will remain under pressure as unemployment rises and wage growth slows. Part-time employment, the RBNZ highlighted, has risen significantly - the decline in workers’ hours has squeezed household incomes. The RBNZ highlighted that per capita incomes have fallen 2% over the past year, the largest decline since 1992, increasing the likelihood of defaults. This explains why the RBNZ today flagged its growing concern about banks becoming more lenient in their lending practices to households, offering home loans with higher loan-to-value ratios.

Part of this stress on household balance sheets has been alleviated by falling mortgage rates, but domestic lending rates now are rising because market pricing now implies earlier and more extensive increases in the OCR. More borrowers have moved toward short-term borrowing, however; this, we believe, is a trend the RBNZ wants to see continue for an extended period before the next tightening cycle begins, so that hikes to the OCR, when delivered, get the most bang for their buck.

Our forecast remains that the RBNZ will kick-off the next tightening cycle in July 2010 with a 50bp hike. We acknowledge the risk of an earlier RBNZ rate hike amid a sustained string of firmer consumer-related data, particularly that related to the housing market. Continued strength in the housing market could encourage households to take on more debt, which the RBNZ will be prepared to cool by hiking the OCR sooner.


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