30 May 2018

RBNZ warns M bovis could hurt financial system

12:51 pm on 30 May 2018

The spread of the cattle disease Mycoplasma bovis could lead to losses for banks, the Reserve Bank has warned.

FOR WATER TAX story - Generic cow

Photo: RNZ / Rebekah Parsons-King

In its six monthly update on the health of the financial system, the central bank highlighted the outbreak as an emerging risk for the dairy industry.

"Mycoplasma bovis has potential to negatively impact the productivity and profitability of the sector, and could lead to losses for banks," Reserve Bank governor Adrian Orr said.

He said its effect on the sector would depend on how widespread the disease had become and how the government and industry would manage the response.

On Monday, the government announced a 10-year plan to eradicate the disease, saying about 150,000 cows would have to be slaughtered.

Prime Minister Jacinda Ardern said the government had "one shot" at eliminating the disease, at a cost of about $886 million to government and industry bodies, with no guarantee of success.

The dairy farming sector also remains highly indebted, and the Reserve Bank said it was vulnerable to a future downturn in prices.

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Adrian Orr Photo: NZ Super Fund

Record levels of household mortgage debt also continued to worry the Reserve Bank, though Mr Orr said the slowing in lending and house price growth has lessened the risk.

"In part due to our imposition of loan-to-value (LVR) ratio restrictions," he said.

In January, the central bank eased lending restrictions, and Mr Orr said he wanted to see a sustained period of subdued lending growth before he reduces the loan-to-value ratios further.

Overall, Mr Orr said the financial systems remained sound, with banks holding sufficient capital reserves to help weather an economic shock.

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