NZ in 'good position' - Reserve Bank

By Phil Boeyen, ShareChat Business News Editor

Wednesday 21st November 2001

The Reserve Bank says New Zealand has good reason to be more optimistic than many of its trading partners as the world slowdown begins to be felt.

Reserve Bank governor, Don Brash has told a meeting of business people in Whangarei that although New Zealand will be affected by the world slowdown, the country is not completely hostage to external events.

He says the country starts the slowdown from a good position and although export prices are falling, it is from a high US dollar level and an even higher NZ dollar level.

"This low exchange rate provides very useful insulation from the downturn in the world economy, by propping up returns to New Zealand exporters, and indeed returns to those competing with imports, despite weaker prices abroad."

Mr Brash says while business confidence has also declined, at the end of last month more businesses continued to expect an improvement in their own business over the year ahead than expected a deterioration.

"Interestingly, surveys conducted in September by both the Employers and Manufacturers Association in Auckland, and the Canterbury Manufacturers Association in Christchurch, showed a remarkably upbeat mood in both cities. And both surveys were conducted after the events of 11 September.

"A survey conducted by Bancorp in late October found respondents more optimistic about general business conditions, and more confident about increasing investment expenditure, than a similar survey four months earlier."

The Reserve Bank governor adds that the bank's recent cut in the official cash rate will help to cushion the effects of the international slowdown.

"But if we need to reduce the official cash rate further, there is clearly plenty of room to do so, and in that respect we are in a very much easier position than the one in which the Japanese central bank finds itself, with official interest rates already at zero, and with no further reductions possible.

"So there is good reason for businesses in New Zealand to be more optimistic about the future than is the case in many of our trading partners: New Zealand starts from a situation of relatively strong growth, and there is ample scope for monetary policy to stimulate the economy if that should be needed, without jeopardising price stability."

Meanwhile the bank says it remains vigilant over rising prices but is also keeping watch to ensure deflation doesn't occur.

"Inflation going below zero would be just as much a breach of the Reserve Bank's inflation target as having it go above 3%," says Dr Brash.

"Deflation causes its own set of economic problems and distortions, doing social and economic damage. And our policy deliberations are always, without exception, mindful of both risks."

Dr Brash says that as a rough rule of thumb once price stability has been achieved the Reserve Bank's monetary policy will be to restrain inflationary pressures by raising interest rates roughly half the time and restrain disinflationary pressures by lowering interest rates roughly half the time.

The Reserve Bank speech came at the launch of a nation-wide roadshow that will see Dr Brash talking at 24 meetings of small- and medium-business operators throughout New Zealand.

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