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Soaring property prices and falling dairy prices driven by China's weakening demand are posing risks for New Zealand's otherwise sound financial system, the Reserve Bank of New Zealand warned Wednesday.
"Stress tests of all the major banks' portfolios undertaken over the past six months demonstrate that banks have the capacity to manage a range of adverse shocks," RBNZ government Graeme Wheeler said on the release of the November Financial Stability Report, published every six months.
However, key risks persisted for the financial system, Wheeler said in a statement.
The RBNZ would maintain tighter loan-to-value mortgage lending requirements, introduced in October last year, said Wheeler, in apparent contradiction to reported comments from Finance Minister Bill English this week that the restrictions were "on the way out. "
"The reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows," said Wheeler.
The RBNZ did not consider it appropriate to ease the curbs at this time and would continue to closely monitor the housing market, he said.
Deputy governor Grant Spencer said risks in the dairy sector have increased with lower payouts to farmers possibly leading to rising loan defaults.
"Lower global dairy prices are in large part due to reduced demand from China, highlighting New Zealand's vulnerability to a slowdown in the Chinese economy," Spencer said in the statement.
"Risks arise both from New Zealand's large volume of trade with China, and also from any financial market disruption that could arise from a Chinese economic slowdown."
The banking system's reliance on offshore funding was also susceptible to volatility in international markets, said Spencer.
The RBNZ was undertaking a stock-take of the regulatory framework to ensure it met its objectives clearly and consistently and several initiatives were underway to better measure and define bank capital adequacy. Enditem
