The ratings agency has released a statement on the outlook for the New Zealand market and it warns there is a risk of a spike in house price inflation occurring.

This could occur if the banks pass through the full OCR cut to home loan borrowers, as it would result in further demand pressure.

If house prices resume their rapid growth, Standards & Poor’s expect to conclude that imbalances are rising.

“This would further heighten the risk of a sharp correction in house prices and expose the banks operating in New Zealand to a material increase in credit losses.

“In this scenario, we expect that the credit profiles of banks and similar financial institutions operating in New Zealand would come under pressure.”

However, the ratings agency noted that the major banks have not passed through the full extent of the 25 basis points cut to customers.

Further, such a scenario would run contrary to their base-case expectations and New Zealand’s property market should remain steady, it said.

“Our base case remains that the rise in New Zealand house prices will slow over the short to medium term and eventually result in an orderly unwind.

“It is also our view that the full impact of macro prudential tools on house price inflation that became effective on November 1, 2015, remains to be seen.

“We observe that the growth in house prices in Auckland has shown recent signs of cooling.”

Meanwhile, the OCR cut could have a potential positive impact on New Zealand's stressed dairy sector, the ratings agency said.

“We are of the view that the lower official interest rates, if passed through, will provide some relief for the sector, especially those highly indebted farmers that are more exposed to cyclical downturns.”

Standard & Poor’s statement follows the recent release of its outlook for the New Zealand banking sector.

That report pointed to a spike in house prices and prolonged lower dairy prices as two key risks that could weaken the rating agency’s stable assessment of New Zealand’s banking system.