On 13 November 2018 you made a request to the Reserve Bank under section 12 of the Official Information Act (the OIA) seeking:

Transcription

1 December Via Dear On 3 November you made a request to the Reserve Bank under section of the Official Information Act (the OIA) seeking: all Reserve Bank Financial System Roundups released for October and November. The relevant documents are: - Reserve Bank Financial System Roundup, October - Reserve Bank Financial System Roundup, November Copies of these documents are attached. Under the provisions of section of the Act, you have the right to complain to the Ombudsman of the Reserve Bank s decisions about your information request. Yours sincerely Roger Marwick External Communications Adviser The Terrace, PO Box 9, Wellington, New Zealand Telephone 7 9 Online at

2 IN CONF IDENCE Reserve Bank Financial System Roundup October For further information, contact: Steffi Schuster, Acting Head of Macro Financial Department, RBNZ (-7 3) FINANCI AL AL MMARKET DEVELOPMENT S S Financial conditions continue to loosen in advanced economies and tighten in emerging markets Despite the FOMC continuing to normalise monetary policy settings, financial conditions in the US are continuing to loosen. Although long-term bond yields have risen, corporate credit spreads have narrowed and equity markets have continued to break new historical highs. Easing financial conditions and fiscal stimulus have continued to support robust real activity in the US into Q3. In contrast to the US, financial conditions in most emerging market economies have continued to tighten, with pressure from higher interest rates, capital outflows, and falling exchange rates. As a result, the correlation of financial conditions between advanced economies and emerging markets, which was positive during the search for yield after the GFC, have become increasingly negatively correlated Bloomberg Financial Conditions Indices Looser Tighter - Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Oct-7 Jan- Apr- Jul- US Euro Area Asia ex Japan Some emerging market central banks have continued to raise interest rates, in part, to protect their currencies. In recent weeks there have been policy rate hikes in Turkey, Russia, Indonesia, and the Philippines. Argentina and the IMF agreed to a revised aid package. The package was boosted by $7.bn to $7.bn, and the disbursements will be more heavily front-loaded to help Argentina repay its large debt maturities over the next year or two. Emerging market economies are likely to remain vulnerable to capital outflows while the US continues its hiking path. Among New Zealand s trading partners in Asia, the most vulnerable are countries with current account deficits, notably Indonesia, India, and the Philippines. Overall, economies in Asia are in better positions to absorb the capital outflow shocks than many other emerging market countries, with low inflation, steady growth and large buffers of foreign exchange reserves. Trade tensions continue to build International trade tensions, especially between the US and China, have continued to intensify. The US introduced tariffs on $bn of Chinese imports. The rate will be percent initially, increasing to percent if no deal is reached by next year. Taken together with the tariffs introduced earlier on $bn of Chinese goods, this covers around half of Chinese imports to US in total. China retaliated to the US action by announcing tariffs on $bn of imports from the US (rates of percent or percent). Meanwhile, in Europe, Brexit negotiations remain at an impasse over trade barriers on the Irish border. In a positive development on the global trade front, China confirmed that it will cut tariffs on a range of imports (including machinery, textiles, and construction materials) from November. These reductions, combined with cuts announced earlier in the year, will lower its average most-favoured nation tariff rate to 7. percent from 9. percent. US and Canada have reached agreement on a trade deal to replace NAFTA, the USMCA (United States- Mexico-Canada Agreement). The deal will be signed before the end of November and then submitted to Congress. It will be reviewed every years. New Zealand remains relatively unaffected by the recent international developments, and with monetary policy still expected to stay on hold for an extended period, is not a major focus for market traders. New Zealand financial conditions are easing, because of lower mortgage rates and lower exchange rate. The lower currency has been mostly driven by relative monetary policy expectations. 3

3 Household credit growth moderates Annual growth in household credit has stabilised at percent from January. The two components of household credit, housing and consumer lending, grew by percent in the year to August. Housing credit growth picked up slightly. Consumer credit growth declined significantly over the past few months, down from a peak of. percent in the year to February. Annual household credit growth 3 month moving average Mortgage rates decline Bank mortgage rates have declined recently. Deposit funding has remained strong, with annual growth at percent in the year to August. Banks are currently well funded and have reduced their reliance on wholesale funding. Some banks have cut their mortgage rates, partly due to competition between banks. We could see more mortgage rate cuts as banks compete more. FINANCI AL SYSTEM AND POLICY 9 Housing year year year Consumer Bank mortgage rates - 9 Agriculture credit growth increases slightly Bank credit to the agriculture sector has picked up in recent months. In particular, credit growth to the horticulture sector (a component of other in the chart) has remained strong with an annual growth rate of 7 percent in August. Credit growth to the sheep and beef sector has declined, while credit growth to the dairy sector remain fairly muted in recent months. - Annual agriculture credit growth - Non-performing loans remain low The profitability of the banking sector has been supported by strong asset performance in recent years. Non-performing loans remain low by historical standards across most sectors, with the system-wide non-performing loan ratio at. percent of gross loans in July... Total Dairy Sheep/Beef Other Non-performing loans as a percentage of gross loans Template (Month YYYY) 3

4 MARKET I NDI CATORS EXCHANGE RATES October change change NZDUSD NZDEUR NZDAUD.9.. NZ TWI INTEREST RATES October bps change bps change OCR.7 NZ 9 day bank bill NZ yr govt bond.3-3 Australia yr govt bond. -7 US yr govt bond 3. Germany yr govt bond. UK yr govt bond. Italy yr govt bond COMMODITIES October change change Brent Oil Gold, CRB..7. SHAREMARKETS October change change S&P,9..3 Euro Stoxx ASX, NZX 9, VIX Volatility

5 IN CONF IDENCE Reserve Bank Financial System Roundup November For further information, contact: Steffi Schuster, Acting Head of Macro Financial Department, RBNZ (-7 3) FINANCI AL AL MMARKET DEVELOPMENT S S Domestic financial conditions Financial conditions have eased noticeably this year, even though the OCR has remained at.7 percent throughout. This has largely been due to the Bank signalling that the OCR is likely to remain at its current level for a considerable period. In response, swaps rates have declined across the curve, in contrast to rates overseas. As swaps rates have declined, fixed mortgage rates have fallen. The New Zealand dollar has depreciated. percent year to date, adding to the easing in financial conditions. The depreciation has partly been driven by the divergent paths of monetary policy between New Zealand and other economies, especially the United States. It has also reflected some worsening of the outlook for global growth. Labour market data released on 7 November showed the unemployment rate fell in the September quarter to 3.9 percent, its lowest level since the GFC. The New Zealand dollar rose.9 percent as a result of the data, and is up percent from one month ago. International developments Global growth remains strong in many of New Zealand s trading partners. However, growth is expected to moderate from here and risks remain skewed to the downside. The outlook has worsened a little over recent months as a couple of key risks have begun to crystallise. In particular: ) trade policies have become more protectionist, and ) the ongoing withdrawal of US monetary stimulus has caused financial conditions in emerging market economies to tighten. In response, the IMF has lowered its global growth forecast for -9 from 3.9 to 3.7 percent. Global trade policies have become considerably more protectionist this year. A range of tariffs have been imposed that were earlier considered a tail risk. Increased trade barriers could lead to a sizeable fall in global trade and a notable decline in output. The IMF suggests that higher tariffs would reduce output directly through higher trading costs, and indirectly as reduced confidence restrains business investment and leads to higher costs of capital. Financial conditions have tightened considerably in Asia this year. The economic outlook for the region has deteriorated due to tighter financial conditions, slowing Chinese growth, and the potential impact of increased barriers to global trade. However, the impact on New Zealand GDP is likely to be minimal. US corporate earnings Despite the headlines of weak earnings from some bellwether or high profile US companies, overall, earnings have been robust. Of the companies that have reported, around 77 percent have beaten earnings expectations, and only percent have been weaker than expected. On average, corporate earnings results have beaten expectations by. percent, larger than the average surprise during the past year (. percent). While corporate earnings have generally held up in Q3, markets are less confident about the future outlook due to the concerns around higher tariffs reducing sales revenue and raising input costs. Spillovers to New Zealand There are three main channels through which a worsening global outlook and increased downside risks could affect New Zealand: ) Reduced demand for exports and lower commodity prices; ) Higher funding costs, including for New Zealand banks, as risk premia increase; and 3) A weaker New Zealand dollar, which would partly offset the negative economic impact of the first two channels. There are some early, albeit limited, signs of these spillovers to New Zealand. In particular, dairy prices have fallen, although this is also due to increased supply. As discussed above, the depreciation of the New Zealand dollar this year has been partly due to the worsening global outlook. However, banks marginal funding costs have remained relatively stable this year.

6 FINANCI AL SYSTEM AND POLICY Relatively high banking system profits ANZ, BNZ and Westpac recently reported increased profits, an increase of, and percent respectively over the past year. For the system as a whole, profitability remains high relative to other OECD countries. This mainly reflects strong cost efficiencies in the New Zealand banking system and low levels of impairments. However low costs could be indicative of under-investment, and banks need to continue to invest in systems and processes to effectively manage risks. Return on assets (OECD countries) New Zealand Housing lending growth stabilises Annual household credit growth has stabilised in at about percent. New Zealand registered banks outside the five largest banks ( smaller banks ) have grown their housing lending much faster than the larger banks over the past three years. Housing lending by smaller banks has slowed over the past year. It grew by percent in the year to September, well below the peak of percent in August 7. 3 Annual housing lending growth Five largest banks Smaller banks NZ banking system cost-to-income ratio Dairy prices continue to decrease Dairy prices have been trending down in recent months, down 9 percent from recent highs in May. The latest GlobalDairyTrade auction saw a decrease in the whole milk powder index of.9 percent and a decrease in the overall index of. percent. In response to these price declines, Fonterra revised its -9 season forecast payout to a range of $. to $. per kgms (excluding dividends). Despite the downward revision, the payout remains well above most farms break-even payouts. Index GlobalDairyTrade WMP price index Rebased = USD NZD Index

7 MARKET I NDI CATORS EXCHANGE RATES November change change NZDUSD NZDEUR NZDAUD NZ TWI 7... INTEREST RATES November bps change bps change OCR.7 NZ 9 day bank bill.97 NZ yr govt bond.7 - Australia yr govt bond.73 - US yr govt bond 3. - Germany yr govt bond. - UK yr govt bond.3-3 Italy yr govt bond COMMODITIES November change change Brent Oil Gold, CRB SHAREMARKETS November change change S&P, Euro Stoxx ASX, NZX, -3.. VIX Volatility