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Household saving threatened by increased appetite for credit, RBNZ says

Wednesday 13th November 2013

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Improvements in the country's household savings rate in recent years as people got on top of stretched balance sheets during the longest recession in 20 years may be under threat amid increased appetite for credit, according to the Reserve Bank.

New Zealand's private savings have been increasing since 2010 as households cut back investment and put more money in banks' term deposits, though rising demand for credit may test that, the Reserve Bank said in its six-monthly financial stability report.

Deputy governor Grant Spencer said that improvement in private savings has helped reduce the nation's external deficit, though new investment will likely stretch that trend, and stressed the importance of household savings and for the government to reduce its operating deficit.

"Strong growth in retail deposits has allowed banks to reduce their reliance on offshore funding in recent years," Spencer said in a statement. "Any sustained worsening of New Zealand's external position will cause the banks to become more reliant on the international markets, thereby increasing their exposure to funding risk."

The country's current account deficit, which is the shortfall between what it earns and borrows from other nations, is forecast to widen over the next three years, and any stronger local credit could leave New Zealand more exposed to overseas markets, the report said.

The central bank said household debt has continued to grow faster than disposable income, with gains in net wealth stemming from the rapid appreciation in property values. That leaves households' balance sheets at risk of getting stretched if house prices turnaround, or when interest rates start rising next year.

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