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New Zealand's Financial System Supported By Health, Fiscal And Monetary Policy Responses


Tēnā koutou katoa, welcome all.

The Reserve Bank – Te Pūtea Matua has used its monetary policy and regulatory tools in unison to respond to the challenges of COVID-19 to achieve the best outcomes for the economy and financial stability.

“Ongoing containment of COVID-19, and significant fiscal and monetary support, have ensured that the New Zealand economy has been relatively resilient to the economic shock from the pandemic so far,” Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report.

“The relatively resilient economic outturn means that the New Zealand financial system has not been tested as severely as it could have been. The banking system has maintained strong buffers of capital and liquidity, and the insurance sector remains well capitalised,” Mr Orr says.

Economic activity contracted sharply in the June quarter and remains below pre-COVID-19 levels. Significant fiscal and monetary support acted to limit the extent of the shock to both households and businesses. The business sector also proved innovative, through the adoption of technology and flexible operating practices. Business failures and unemployment have both proved lower than expected to date, as well as banks’ non-performing loans.

Low interest rates have also supported the economy by lowering barriers to invest, improving cash-flows, and ensuring the New Zealand dollar exchange rate remains competitive. This stimulus will continue to support the economic recovery.

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Governor Adrian Orr signalled caution however, saying COVID-19 remains rampant internationally, implying significant risks to New Zealanders’ health and economic prosperity remain.

“Businesses domestically and internationally face ongoing challenges as fiscal support measures unwind, which will lead to an increase in loan impairments for banks,” Mr Orr says.

Deputy Governor Geoff Bascand acknowledged that actions to support employment and investment have also spurred on activity in the housing market, resulting in an increase in higher-risk lending, particularly to property investors. This increases longer-term vulnerabilities to households and banks should severe economic risks eventuate.

“High leverage in the housing sector poses risks if house prices fall sharply or unemployment rises, reducing the ability to service loans. This is why the Reserve Bank intends to re-impose LVR restrictions to guard against continued growth in high-risk lending and ensure that banks remain resilient to a future housing market downturn,” Mr Bascand says.

In concluding, Mr Bascand noted that the financial system has a crucial role to play in supporting the economic recovery.

“In particular, banks need to continue to support their customers and maintain their appetite to lend. For its part, the Reserve Bank remains committed to supporting the long term financial stability of our economy, this is why we have undertaken a number of temporary regulatory actions to ensure that banks have sufficient capacity to remain supportive. Ongoing capital relief and a continuation of banks’ dividend restrictions both support the continued provision of credit, particularly to the business sector,” Mr Bascand says.

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