The financial system remains stable and resilient, despite growing uncertainty in global markets linked to the conflict in the Middle East, according to the Reserve Bank of New Zealand’s latest Financial Stability Report.
The report said volatility had increased in global financial markets, raising the risk of higher borrowing costs for banks and sharper movements in asset prices. This matters because New Zealand banks source about one-fifth of their funding from offshore markets.
However, the RBNZ said the banking sector remained well placed to support customers and continue lending, even if economic conditions deteriorate.
Banks remain well capitalised
The report found banks continue to hold strong capital and liquidity buffers, supported by high levels of customer deposits and solid profitability.
Recent stress tests also suggested banks would remain capable of managing severe geopolitical shocks and economic downturns.
While economic growth in New Zealand had begun recovering before the latest conflict erupted, the RBNZ warned the recovery could now slow. That could affect employment opportunities and place renewed pressure on households and businesses with debt.
Even so, the banking system was described as resilient, with the RBNZ saying banks remain capable of withstanding shocks while continuing to provide credit to the economy.
What this means for borrowers
One of the more significant developments for borrowers is the RBNZ’s recent review of bank capital requirements.
Changes announced in December are expected to reduce funding costs for banks over time, which could eventually flow through to slightly lower interest rates for households and businesses than would otherwise have been the case.
The RBNZ also noted that some mid-sized banks may begin competing more aggressively for customers, particularly for mortgages with low loan-to-value ratios.
At the same time, the report highlighted how sensitive lending markets remain to changes in global conditions. Mortgage refinancing between banks surged late last year, partly due to cashback offers of up to 1.5% of the loan value as banks competed for customers while rates were near their lowest point.
Housing market remains subdued
The RBNZ said the housing market generally remains soft, with national property prices broadly flat over the past three years.
Elevated housing supply continues to weigh on prices in some regions, particularly Auckland and Wellington, while mortgage lending growth has remained subdued.
For borrowers, the report is a reminder that while New Zealand’s financial system remains stable, global events can still influence interest rates, lending conditions and economic confidence.
Contact us if you would like to discuss your borrowing options or review your current lending structure in light of changing market conditions.
