The Reserve Bank is warning of the potential economic impact of the spread of Mycoplasma bovis

In its six-monthly Financial Stability Report, the central bank says incomes and debt levels in the dairy sector have stabilised.

But it says the infection could lead to losses on bank lending to dairy farmers.

Reserve Bank governor Adrian Orr says the sector remains highly indebted and vulnerable.

He says most dairy farms are cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agricultural shocks.

Overall, Orr says the financial system remains efficient and sound.