New Zealand central bank says system sound but domestic debt is a risk

[WELLINGTON] New Zealand's financial system is sound and key vulnerabilities were broadly stable over the past six months, the central bank said on Wednesday, but risks remained from high domestic debt levels and rising international interest rates.

Reserve Bank of New Zealand Governor Adrian Orr also said that while financial risks had lessened as both lending and house price growth slowed, there would be no further easing of mortgage lending restrictions for now.

The report named three key vulnerabilities to the financial sector - household sector indebtedness, dairy sector indebtedness, and exposure to international risks.

"Ultimately, continued stabilisation, or a further reduction, in the growth rates of household debt and house prices, will be required before the risk to the financial system is normalised," the bank said in its semi-annual Financial Stability Report.

The central bank is monitoring the risks of higher international interest rates and risk premiums, which could increase funding costs for banks and ramp up borrowing costs.

"The most prominent international risk is disruption from a rapid increase in global interest rates, as central banks tighten monetary policy," the bank said.

The New Zealand dollar was largely unchanged in the wake of the release, slipping to US$0.6896 from around US$0.6900, having previously falling more than 0.5 per cent overnight on negative global risk sentiment.

MORTGAGE RULES REMAIN

At the previous review in November, the RBNZ said it would partially unwind loan-to-value ratios (LVR) restrictions to offset the impact of planned government curbs on the housing market.

The RBNZ noted that lending and house price growth had slowed in the past year, but said it needed further evidence of a cooling before more loosening of rules.

"This more subdued lending growth needs to be further sustained before we gain sufficient confidence to again ease the LVR restrictions," the RBNZ said.

Some economists had thought that the central bank might ease the restrictions further.

"They could have easily tweaked them again but ... they're taking a very cautious approach there, they're still worried about the potential for the market to take off again," said Philip Borkin, senior economist at ANZ Bank.

House prices have risen more than 50 per cent nationally over the past 10 years, and almost doubled in Auckland, New Zealand's largest city, while household debt levels have soared.

Prices have recently cooled, slowed by an uncertain election period in 2017, the LVR restrictions and wider taxes on investment properties announced by the government.

REUTERS