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RBNZ Expects Slower Recovery for New Zealand Economy Amid Middle East Conflict Despite Resilient Financial System

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The Reserve Bank of New Zealand expects New Zealand's economic recovery to be slower due to the Middle East conflict reducing profits for businesses as a result of higher oil prices, causing them to invest less and households to save more, according to the central bank's financial stability report published on Wednesday.

The bank noted that business deposits have declined as a share of gross domestic product over the past three years, particularly for smaller firms, suggesting that businesses do not have the same cash buffers now.

Financial markets have become more volatile due to the Middle East conflict, RBNZ said. While New Zealand banks are well funded and have the flexibility to manage short-term disruptions, this volatility could interact with other vulnerabilities and result in a more significant tightening in financial conditions internationally, the central bank added.

RBNZ said New Zealand's four largest banks would maintain capital buffers even in a stress scenario where the unemployment rate peaks at 10.5%, gross domestic product declines by 6.5%, and house prices fall by 35%.

The central bank said it will release a crisis preparedness consultation package in June, including additional loss-absorbing capital requirements, which would provide a key source of resilience if a scenario worse than the 2025 stress test eventuated.

The Depositor Compensation Scheme, which became operational in July 2025 and provides a government-backed guarantee for deposits up to NZ$100,000 if a deposit taker fails, has boosted deposit growth for finance companies, enabling them to reduce term deposit rates to only slightly above what banks are offering, the report added.

The housing market generally remains soft, with elevated inventories weighing on house prices, particularly in Auckland and Wellington, with prices around the top of the RBNZ's estimated sustainable range, although rising mortgage rates could reduce house prices further, and growth in mortgage lending has been subdued, the report added.

The performance of insurers has been mixed, with health insurers adapting to higher claims costs partly by raising premiums, while dwelling and general insurers have benefited from fewer large claims events, although impacts on claims costs and supply chain disruptions from the Middle East conflict could affect general insurers, who account for about 60% of premiums, RBNZ added.

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