There's no 'jingle mail' in New Zealand and our banks have no appetite to take possession of houses they have loaned money on, Reserve Bank Governor Adrian Orr said.
On Thursday Orr appeared before Parliament's Finance and Expenditure Committee to answer questions about the release a day before of the RBNZ's latest six-monthly Financial Stability Report.
Orr was asked about his comments that mortgage borrowers who may be getting into difficulty as a result of rising interest rates should talk to their banks and asked to amplify just what sort of assistance people should seek.
He said that as part of the initial lending criteria households were put through "a series of what they reported as uncomfortable financial tests".
"So, it’s about the banks working with the people to make sure those plans are still in place, making sure households are making appropriate choices on their discretionary spending with their mortgage rates increasing and to provide, if needed interest rate only loans and if needed mortgage deferrals," Orr said.
"All of these things have been done in the past and are done continuously.
"New Zealand does not have an economic history similar to say the US where they call it, what is it? jingle mail where people just hand their house back to the banks.
"There is no appetite from banks in Aotearoa New Zealand for that to happen. So there are many flexibilities that banks can provide. There are also many [bank] customers.
“So, get in touch with your bank now if you feel that you may be one of those households that need support.”
Asked whether mortgage customers were already in a 'perfect storm' as a result of some mortgage rates now already higher than what the test rates were for customers, Orr noted that the interest rates being referred to were those of today that new customers would be offered.
“There will be a rollover period over the next year or so as people step up on to the higher rates as the mortgage rolls over. So, it’s important to always differentiate between new buyers today and the stock of mortgages that are out there.
"That being said there is a cohort who will be facing higher debt servicing challenges than the banks have stress tested against, but they will need to be talking with the banks around that activity. They are the minority, not the majority."
Orr faced a number of questions about the RBNZ's efforts against inflation and how the bank may or may not have contributed to our 7.2% inflation by the stimulus provided in 2020 during the onset of Covid.
But Orr, who said he was “laser-like focused” on getting inflation down back into the targeted 1% to 3% range deferred answers till the release of the pending five-year review of monetary policy next week and the next Official Cash Rate review on November 23.
However, on inflation, he said: "The shocks still arriving through the global economy are significant and this is where people need to think about their own ability to weather an enormous amount of unanticipated activities.
“Meanwhile around our confidence of having inflation under control – that is very high, because we control the end outcome through the interest rate environment. So, that’s a guessing game. That’s about the things we will have to do to achieve low and stable inflation, subject to the continuing buffering of shocks left right and centre. Resilience and humility."
And on the degree of monetary stimulus in 2020: "Lower interest rates lead to more spending that leads to higher inflation and that was a deliberate strategy and policy in a very, very uncertain period.
"The worse case scenarios did not occur because we stepped in and have done what we’ve done – fiscal/monetary policy and everything else that the people of Aotearoa did.
"We are still here. We still have a strong financial system. But inflation’s too high. And monetary policy was part of that.
“I will repeat, just so you get a sense of the significance of it. For inflation to have been in the 1% to 3% inflation target range at present, we would have had to forecast the impact of Russia’s invasion of Ukraine in 2020 – two years ahead of the actual event. That is the nature of the shocks that are leading to current high headline and CPI inflation in addition to some residual fiscal and monetary policy outcomes."
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