“What we observe in the dairy sector in particular, is the structure of the industry – the high leverage nature of the industry – leads to a very high vulnerability to shifts and interest rates up and down,” Orr said in testimony to a parliamentary committee.
Dairy is the country’s biggest export earner, and the primary sector including agriculture, forestry, fishing and mining accounts for 7% of gross domestic product.
New Zealand mortgage rates have risen rapidly since the end of 2021 as the central bank has increased its official cash rate from 0.25% to 5.25%. At the same time, farmers have faced increased costs for supplies such as fertiliser and dairy prices have fallen by more than a third over the last year.
“Cost pressures remain so there’s definitely challenges in the sector,” he said.
However, senior RBNZ officials also noted that debt levels in the sector are down significantly from five years ago when the central bank was highlighting debt as a major vulnerability for the dairy sector.
In its Financial Stability Report released on Wednesday, the RBNZ said the financial sector was resilient but there were growing cash-flow pressures in some households.
RBNZ Deputy Governor Christian Hawkesby told the same parliamentary committee that the central bank was not concerned about New Zealand’s growing current account deficit.
The country’s current account deficit widened to 8.9% of gross domestic product in the fourth quarter of 2022, leading to concerns from ratings agency Standard & Poor’s.
“New Zealand government debt is still relatively low compared to other countries, and that puts us in a strong position,” Hawkesby said.
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