New Zealand’s financial system is well placed to handle the challenging economic environment, according to the Reserve Bank of New Zealand.
In its most recent Financial Stability Report, released earlier this month, the Reserve Bank noted that conditions were becoming more challenging, with interest rates rising and the economy likely to slow.
“Despite these challenges, New Zealand’s financial system is well placed to support the economy in the face of a rising interest rate environment,” it said.
“Banks’ capital and liquidity positions are strong, and profitability and asset quality remain high. Recent stress tests demonstrate banks’ resilience to scenarios involving rising unemployment and interest rates, and declining house prices.”
The Reserve Bank also noted that businesses in many industries have reduced their debt levels in recent years, “which will limit vulnerabilities as debt servicing costs increase and demand slows”.
While the financial system is in good shape, the Reserve Bank promised not to be complacent.
“We continue to strengthen our regulatory, supervisory and enforcement frameworks to support the stability of the financial system over the longer term, and are guided in this by our assessment of the risks to it and its vulnerabilities,” it said.
What you can do with your finances
The Financial Stability Report gave an indication of how rising interest rates will affect borrowers’ finances.
For households with a mortgage, the average percentage of disposable income dedicated to debt servicing is expected to rise from a recent low of 9% to 20%, based on current mortgage rates, according to the Reserve Bank.
“Repayment increases will be particularly significant for many households that first borrowed in the past two years,” it added.
So if you’ve got a mortgage, it would be prudent to budget for higher repayments.
At the same time, it might be wise to look for ways to reduce your expenses.
Reach out if you’d like to discuss your options.