Reserve Bank Governor Anna Breman has told New Zealanders the country’s financial system can absorb the shocks now rolling out of the Middle East, but the recovery from three flat years is going to take longer than the central bank had hoped just six months ago.
The May 2026 Financial Stability Report, released by the Reserve Bank on Tuesday, lands in the middle of a global energy scare that started when shipping through the Strait of Hormuz was disrupted by the Iran and Israel conflict. Diesel has lifted sharply, freight rates have widened and parts of the economy that run on heavy fuel, including transport, logistics, forestry and fishing, have been the first to feel it.
Breman said in the report that “we are now likely to see a somewhat slower recovery, affecting job growth and debt servicing”, a shift in tone from the previous report in November when the central bank was still expecting a steady pickup. She added that “the global risk environment has worsened over the past six months, as conflict in the Middle East threatens world energy supply”.
The Reserve Bank’s headline message was still positive on the banking system itself. Banks have “strong capital and funding buffers” and the most recent stress test showed they could absorb a major economic and geopolitical shock without falling below regulatory minimums. The four big Australian owned banks, plus Kiwibank, hold capital well above the levels required after the post 2019 reforms, and the system as a whole is still earning around $10 billion a year in pre tax profit.
That profit pool was put under unusual pressure late last year when the banks fought a short, expensive cashback war for new mortgage customers. The central bank said cashback offers reached up to 1.5 per cent of the loan balance, well above the 0.9 per cent that had become the industry norm, and that almost three times the usual amount of mortgage debt switched lender during the period. The episode cost banks around $100 million in foregone earnings, a number the Reserve Bank described as small relative to annual profits but large enough to push competition higher up the regulator’s watch list.
House prices were given a careful signal. National prices have been broadly flat for three years and remain below the November 2021 peak, but the Reserve Bank said they are now sitting “around the top” of its estimated sustainable range. Inventory in Auckland and Wellington is elevated, and the report warned that any sustained rise in mortgage rates, driven by tighter wholesale funding costs flowing out of the Middle East shock, could push prices lower again. The Bank also flagged a recent rise in the share of loans being switched into longer fixed terms, which it reads as borrowers locking in before further cost pressure flows through.
The dairy sector, which sits behind a meaningful slice of bank exposure, was treated as a bright spot. Fonterra is paying farmers a forecast milk price of about $9.70 per kilogram of milk solids, comfortably above an average breakeven cost the Reserve Bank put at $8.50 per kgMS. The co-operative’s $3.2 billion shareholder return, paid out from the sale of its consumer brands, is mostly expected to flow into debt repayment rather than fresh spending. Rural lending arrears are still low, although the report cautioned that fertiliser and diesel costs are creeping into spring budgets and could narrow margins for the lower cost end of the dairy paying scale.
The most pointed warning was reserved for smaller businesses. The Reserve Bank dedicated a focus topic to bank lending to firms below the listed company tier and reported what most owner operators already feel, that interest rates paid by firms vary widely by firm size, industry and the assets backing the loan, and that small New Zealand firms pay higher rates than their Australian counterparts on average. The report described “elevated borrowing costs” as a continuing challenge and said some firms and households may find it harder to keep up with loan repayments, which would lead to higher loan losses for banks even though the system overall stays sound.
Insurance got a relatively clean bill of health. Direct exposure of New Zealand insurers to the Middle East conflict was described as limited, and health insurers’ premium increases over the past two years had improved solvency margins after a long stretch of high claims. The Reserve Bank said it would run a dedicated life and health insurer stress test later in 2026.
For households, the practical take is mixed. Lower official cash rates are still easing servicing costs on housing debt, but the cushion is now thinner because wholesale rates have risen on the Middle East news. The unemployment rate ticked back to 5.3 per cent in the March quarter and wage growth has slowed to a five year low, which the Reserve Bank flagged as a constraint on how quickly mortgage stress can ease for borrowers who came off ultra low fixed rates last year.
Breman, who took the role earlier this year after coming across from Sweden’s Riksbank, said the underlying message of the report is that “the financial system is resilient and well positioned to support households and businesses even if economic conditions soften”. Markets read the report as broadly neutral, with the New Zealand dollar barely moving against the Australian and the two year swap rate close to unchanged on the day.
Additional coverage of the report is available from interest.co.nz and RNZ Business.
What does the slower recovery mean for your household, your mortgage or your small business? Tell us in the comments below how the higher fuel and freight costs are showing up where you are.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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