By Lucy Craymer
WELLINGTON (Reuters) -The Reserve Bank of New Zealand said on Wednesday the country's financial system is as a whole resilient but global financial stress will test this.
"The rising global interest rates necessary to curb inflation will test New Zealand's financial resilience," Governor Adrian Orr said in the bank's financial stability review, which is released twice a year.
"While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment," Orr added.
The RBNZ added there are increasing downside risks to the global economic outlook and despite New Zealand's high levels of employment and a sound government fiscal position, the country is not immune to these risks.
New Zealand's central bank has aggressively hiked interest rates as it has sought to get on top of a red-hot housing market and soaring inflation.
The cash rate is now at its highest level in seven years and mortgage rates have risen sharply putting pressure on housing markets with sharp falls in some locations and a reduction in sales.
The central bank, however, said house prices remain above their sustainable level, and that a further gradual decline would be positive for long-term financial stability.
However, it adds a small number of recent buyers are in negative equity, and this will continue to grow if prices continue to fall.
"With widespread negative equity, banks would be more at risk of losses if people can no longer afford their mortgage, for example if they lose their job," the RBNZ said.