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Financial System Robust To High Interest Rate Environment

New Zealand’s financial system remains strong as it continues to adjust to the higher interest rate environment, Deputy Governor Christian Hawkesby says in releasing the May 2024 Financial Stability Report.

Most mortgage borrowers have now repriced onto higher interest rates as expected, with rising nominal incomes helping many households navigate this transition. However, some are doing it tough and reducing their spending or extending their repayment timelines in order to make ends meet, and a number of households are also facing heightened job uncertainty.

Some businesses face ongoing pressure from increased costs and reduced economic activity. While non-performing loans to businesses have increased, they remain low by historical standards. Near-term risks to the agricultural sector have also eased following the recent recovery in dairy prices.

Global inflation is declining from elevated levels and financial markets have priced in lower policy rates over the next year. However, there remains a risk that new or persistent inflation pressures could mean global interest rates remain restrictive for longer, placing continued pressure on households, businesses and the financial system.

New Zealand’s financial system remains well placed to handle a range of severe scenarios.

Banks’ capital ratios have increased ahead of higher future requirements and liquidity positions remain strong. Scale and profitability challenges continue to weigh on the non-bank deposit taker sector.

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In the Report, we explore the impact of dwelling insurance becoming more expensive or unavailable in some locations. A trend towards risk-based pricing is providing a strong signal to property owners to proactively manage flood and earthquake-related risks. Our recent climate stress test highlighted the importance for banks to also manage their exposure to climate-related risks.

Progress on modernising our prudential regulation framework continues. We are working on developing standards under the Deposit Takers Act and operationalising the Depositor Compensation Scheme. The Report also provides an overview of cyber and technology risk and our approach to support the financial system to build cyber resilience.

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