The International Monetary Fund has just issued its report on Article IV Consultation with New Zealand
In (very) brief:
The IMF says the key macrofinancial vulnerabilities in New Zealand
- Imbalances in the housing market
- Banks' concentrated exposures to the dairy sector
- Banks' high reliance on wholesale offshore funding
The banking sector has significant exposures to real estate and agriculture, is relatively dependent on foreign funding and is dominated by four Australian subsidiaries. A sharp decline in the real estate market, a reversal of the recent recovery in dairy prices, a deterioration in global economic conditions, and a tightening in financial markets would adversely impact the system.
Despite these vulnerabilities, the banking system is resilient to severe shocks
- Results of stress tests and sensitivity analysis across all relevant risk factors indicate that the solvency and liquidity of the banking system can withstand adverse and severe shocks
- That said, the results from stress tests, although a useful supervisory tool, need to be interpreted with caution and the authorities can strengthen the financial sector oversight and crisis preparedness frameworks to further improve the resilience of the system.
The IMF recommends increased bank supervision, more macroprudential measures ....
On the economy (bolding on RBNZ policy is mine):
- New Zealand's continued solid growth performance
- Underpinned by strong construction activity, an accommodative monetary policy, and high net migration
- Growth is expected to stay above trend in the near term before gradually moderating
- Risks broadly balanced with upside risks largely related to strong net migration
- Downside risks stemming from a booming housing market, as well as the potential for tighter external financial conditions, lower demand from trading partners, or disruptions to international trade have increased vulnerabilities
- Endorsed the flexible exchange rate policy and overall macroeconomic policy stance
- Priority should be placed on strengthening macrofinancial resilience and harnessing the opportunities provided by strong economic and population growth
- Directors concurred that the current accommodative monetary policy stance is appropriate for addressing low inflation
- Welcomed the authorities' continued focus on strengthening fiscal buffers while investing in infrastructure and other growth‑friendly initiatives
- Looking ahead, they supported the planned slightly contractionary stance as it would help balance the macroeconomic policy mix in an economy that is operating broadly at capacity.
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