RBNZ: Higher global interest rates could prove to be a headwind to asset prices

Reuters acknowledged that New Zealand's financial system remains resilient despite the challenges presented by COVID-19, the central bank governor Adrian Orr said on Wednesday.

''But the more recent Delta outbreak was creating stresses for some industries and regions - particularly in Auckland, Orr said in the Reserve Bank of New Zealand's financial stability report.

The bank said it we will soon consult on implementing debt servicing restrictions to address housing risks and also intends to increase the minimum core funding ratio (CFR) requirement for banks to its previous level of 75% from January.''

Key notes

 Financial system is well-placed to support economic recovery despite uncertainty and risks.

 A more recent delta outbreak is creating stress for some industries and regions - particularly in Auckland.

With the risk of global inflation heightened, already stretched asset prices are facing headwinds from rising global interest rates.

Supply chain bottlenecks and inflation are adding to stresses in some sectors.

The transition towards living with covid-19 in the community as a managed, endemic disease is changing consumer behaviour.

Strong demand for housing has pushed house prices above their sustainable level, increasing the chance of a correction.

Recent buyers are borrowing more relative to their income, and maybe vulnerable to higher mortgage rates or a fall in house prices.

Will soon consult on the merits of implementing debt servicing restrictions to lean against these housing risks

Intend to increase the minimum core funding ratio (CFR) requirement to its previous level of 75 per cent on 1 January 2022.

Intend to increase minimum CFR requirement to its previous level of 75% on 1 Jan 2022, subject to no significant worsening in econ condition.

Intend to increase min core funding ratio requirement to the previous level of 75% on 1 Jan 2022, subject to no significant worsening in economic conditions.

Capital requirements for banks to progressively increase from 1 July 2022 & is encouraging to see them increasing ahead of these requirements.

Higher global interest rates could prove to be a headwind to asset prices.

We expect banks to be more cautious about high debt-to-income loans given the risks of rising interest rates and to the economic outlook.

Activity uncertain, given novel nature of the shock, and risk of further variants developing/return to tighter restrictions.

Impacts of climate change becoming common, meaning increasing claims for insurers & greater risk to properties that banks use to secure lending.

Building consents data suggest a pipeline of new houses becoming available by next year, which should suppress rent and house price inflation.