Risks to New Zealand’s financial system eased since November, says RBNZ

The Reserve Bank of New Zealand stated again that continues to believe that the financial system is “sound and operating effectively”. However, the central bank has some worries. Particularly, the three main risks are unchanged from the report released in November: housing market vulnerabilities, dairy sector indebtedness and bank funding pressures.

Significantly, the central bank notes that these risks have eased in the last six months, though they “remain elevated”. The RBNZ has welcomed cooler house price growth, but notes that the outlook continue to be uncertain and a “resurgence in house prices might be of real worry. Also, it continues to be worried about the high-DTI lending.

The New Zealand central bank noted banks’ increased dependence on offshore funding; however, it recognizes the attempts they are making to offset this by raising deposit funding and “underpins a cautious approach to managing foreign debt given the insights gained from the financial crisis”. This clearly confirms that a cautious approach by banks to offshore borrowing signifies that NZ needs to increase its saving performance to meet investment requirements, stated ANZ in a research report.

The FSR emphasizes that the increases in dairy prices has alleviated risks in the sector, but that “parts of the dairy sector are over-indebted”.

The central bank found that “retail deposits are relatively insensitive to deposit rates”. Household deposits are sensitive; however, aggregate deposits are not. That strengthens the view that while retail interest rates are biased higher, additional proactive policies are going to be important to drive the rise in domestic saving needed to fund our investment needs, especially as the nation’s earlier modus operandi of funding a saving-investment imbalance through offshore borrowing is more challenged, stated ANZ.

“We are always somewhat reluctant to draw strong conclusions for the OCR outlook from this document. OCR hikes still look a way off”, added ANZ.