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Bank governor's warning over farm debt

Wednesday 7 Nov 2012 10:03 a.m.

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By Paul McBeth

Reserve Bank governor Graeme Wheeler has warned excessive credit growth may trip up New Zealand's economic rebalancing and has singled out agricultural debt as being uncomfortably high in the latest financial stability report.

Credit growth is necessary to stoke economic activity, but if it goes too fast it could increase the country's vulnerability to international shocks and heighten housing market imbalances, Mr Wheeler said.

Households have generally cut back their debt levels as the economy shifts toward increased private savings.

Still, agricultural debt has picked up to an annual pace of growth of 4.5 percent from the start of the year and the sector is vulnerable at elevated levels.

"Household debt remains at relatively high levels, with many borrowers still vulnerable, especially to any correction in house prices," Mr Wheeler said in a statement.

"Leverage in parts of the agriculture sector also remains high, leaving the sector exposed to a fall in export prices."

The twice-yearly financial stability report updates the central bank's view on the health of the country's finance sector, and comes after new governor Mr Wheeler's first monetary policy review last month where he kept the official cash rate at 2.5 percent.

The central bank said dairy is "more vulnerable to a sharp decline in payout than at the time of the peak in dairy prices" with aggregate debt higher than in 2007/08, and more tightly held among the most indebted farmers.

"Declining farm land prices have eroded the equity buffers of indebted farmers, implying banks would consider foreclosing on a larger proportion of farms if the payout fell sharply and was expected to remain weak," the report said.


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