New Zealand's financial system remains resilient amid elevated global uncertainty, and risks to the housing market appear to be contained, although the impact on overall stability will depend on the duration and severity of the Middle East conflict, the country's central bank said Wednesday.
However, the geopolitical situation might result in a slower domestic economic recovery, potentially impacting the employment landscape and creating fresh stress for debt servicing, the Reserve Bank of New Zealand said in its latest financial stability report.
The conflict has triggered a surge in oil prices, with petrol and diesel pushing close to their highest levels in 50 years after adjusting for inflation.
These higher costs are expected to eat into business profits, with some firms already grappling with weak demand and lacking the same cash buffers from three years ago. Chemical and plastic manufacturers, the transport sector, and parts of the primary sector are most exposed to higher input costs, the central bank said.
But despite the risks to the economy, strong export prices mean farmers should be able to manage the shock.
The RBNZ adjusted results from its 2025 bank stress test to assess a hypothetical recession in New Zealand, which showed the unemployment rate peaking at 10.5%, house prices plummeting 35%, and gross domestic product shrinking by 6.5%.
Banks are well-positioned to provide credit even in a challenging environment. Even in such an imagined scenario, the aggregate common equity tier 1 ratio, a measure of financial strength, for the country's four largest banks remains higher than regulatory minimums and "materially above" levels before the 2008 financial crisis.
At a press conference following the report, central bank Governor Anna Breman said unemployment rates for the March quarter "are in line with what they expected from a financial stability perspective."
Data released earlier Wednesday showed the seasonally adjusted unemployment rate fell to 5.3% in the March quarter from 5.4% in the last quarter of 2025. The jobs data reinforced the bank's view that the domestic economy was recovering before the conflict erupted.
During the meeting with the press, Breman added that despite New Zealand's relatively low sovereign debt levels, the country could see some fiscal impact if longer-dated government bond yields rise.