Global financial stress to test NZ’s resilience

Global financial stress to test NZ's resilience

Rising global interest rates to combat inflation will put stress on New Zealand’s financial sector and test its resilience, the Reserve Bank of New Zealand (RBNZ) said.

According to New Zealand’s central bank, the combination of global supply chain disruptions, ongoing food and energy supply shocks, scarce labour resources, and the lagged effects of fiscal and monetary policy is behind the high inflation being experienced worldwide. In response, central banks have rapidly tightened monetary settings to ensure that inflation levels remain within safe levels, but the extent to which economic activity will slow remains uncertain.

“While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment,” said RBNZ governor Adrian Orr. “It is important that financial institutions take a long-term view when supporting customers and allocating credit to the wider economy.”

Despite high levels of employment and a sound government fiscal position, New Zealand is not immune to these risks, RBNZ deputy governor Christian Hawkesby said.

“Rising household debt servicing costs and declining household wealth will put pressure on domestic spending in the near term, but we are confident that the financial system is well placed to support the economy,” Hawkesby said. “Banks’ capital and liquidity positions are strong, and our recent stress tests have demonstrated banks’ resilience to severe economic scenarios.”

RBNZ said its regulated financial institutions should continue investing in their systems, governance, and risk management to strengthen their long-term resilience. RBNZ said that it will continue coordinating with its regulatory partners and the industry to support financial stability while ensuring its priorities are risk-based, evidence-led and outcome-focused.