Over recent months, the global environment has become more uncertain, and New Zealand’s economic recovery is now likely to be slower. The good news is that our financial system remains on solid footing.
Hi, I’m Chris, manager of the team that produces the Financial Stability Report here at the Reserve Bank of New Zealand Te Pūtea Matua.
Today, I’ll walk you through five key financial stability developments, and what they mean for households, businesses, and the wider economy.
1 – Global risks have increased due to the conflict in the Middle East.
Given New Zealand is small open economy, events like this impact our financial system through our imports and exports, our connections to global financial markets, and increased cyber risks. The extent of the impacts will depend on how long disruption persists, particularly to oil supply.
2 – Higher fuel costs are squeezing business margins.
Diesel prices, for example, have been at their highest levels in the past 50 years after adjusting for inflation. The impacts appear largest in sectors such as transport, chemical manufacturing, and parts of the primary sector like horticulture, forestry, and fishing.
3 – The conflict is likely to slow New Zealand’s economic recovery.
Before the conflict started, the New Zealand economy was showing signs of improvement with financial pressures on households and businesses gradually easing.
A slower recovery now looks likely. Higher uncertainty and inflation could weigh on spending, while weaker global growth may slow export demand. This could affect business revenues and the availability of jobs. As a result, some firms and households may find it harder to keep up with loan repayments, leading to increased losses for banks.
4 – New Zealand’s financial system is resilient.
This matters because it means banks and insurers can support households and businesses, even if conditions get worse. Banks have stronger capital buffers than they have had in the past. This makes it easier for them to work with their customers who face financial difficulties and continue to lend.
Looking forward, we expect banks will remain resilient as the changes from last year’s capital review are phased in over the coming years.
5 – Borrowing costs are high for smaller businesses.
In a focus topic in this report, we look at bank lending to smaller firms. The interest rates paid by firms vary widely by firm size, industry and the assets backing the loan. On average, New Zealand firms pay higher rates than those in Australia. We highlight opportunities to improve pricing transparency through better data.
To learn more, see our latest Financial Stability Report on our website.