Key Facts:

– The Reserve Bank (RBNZ) says the country’s financial system remains strong as it adjusts to higher interest rates.
– The majority of households have been able to manage higher mortgage repayments, although the share of mortgage arrears has increased.
– The RBNZ expects an increasing share of borrowers to face significant debt servicing stress as they move on to higher interest rates.
– A significant deterioration in the labor market is a major risk to financial stability.
– Weakening global demand, particularly in China, has contributed to lower commodity prices for New Zealand, which will impact farmers.
– The country’s banking system remains in good shape to handle external shocks and an economic downturn.
– The RBNZ is working on developing a framework for imposing restrictions on high debt-to-income mortgage lending.

Article Summary:

According to the Reserve Bank of New Zealand (RBNZ), the country’s financial system remains strong amidst higher interest rates. While the majority of households have been able to manage higher mortgage repayments, the share of mortgage arrears has increased. The RBNZ expects that a growing number of borrowers will face significant debt servicing stress as they transition to higher interest rates. A significant risk to financial stability is a potential deterioration in the labor market.

Weakening global demand, especially in China, has led to lower commodity prices for New Zealand, which will have an impact on farmers. The RBNZ predicts that some dairy farmers, particularly those with high levels of debt, may incur losses in the current season. However, the banking system remains in good shape to handle external shocks and economic downturns.

The RBNZ is also working on developing a framework for imposing restrictions on high debt-to-income mortgage lending. The central bank is assessing how to calibrate a debt-to-income (DTI) tool alongside loan-to-value restrictions and intends to consult publicly on potential DTI settings in early 2024.

Overall, the RBNZ’s half-yearly financial stability report indicates that while the financial system remains strong, there are pockets of stress that may grow in the medium-term as highly-indebted households face higher debt servicing burdens.

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