Warning against bets on strong kiwi and fast recovery

Wednesday 17th June 2009

Reserve Bank Governor Alan Bollard warned against bets on a rising New Zealand dollar, saying the nation faces a slow recovery and needs to rebalance towards exports and investments, and away from consumption.

The kiwi dollar initially fell to 62.76 US cents after his comments were released, before recovering to 62.85 cents, from 63.10 cents earlier today. The currency has advanced about 34% from its low in March, when it slipped below 50 cents. The currency’s strength is hindering the economy’s ability to rebalance, Bollard told a business audience in Wellington today. The 90-day bank bills were little changed at 2.84%.

“Some recent financial market developments, especially the recent upward pressure on the New Zealand dollar, are working against this rebalancing,” Bollard said, according to an announcement from the bank. “If markets are buying the New Zealand dollar on the expectation of a strong recovery they may end up being disappointed.”

Currency traders had been bracing for some jawboning by Bollard after he made milder-than-expected comments about the difficulties of a high kiwi in his monetary policy statement last Thursday. The stronger exchange rate had caused “unhelpful tensions” with the bank’s projections, he said in the MPS.

Bollard said economic activity in New Zealand was “near its low point,” while the global economy appeared more stable and trading-partner growth forecasts had stopped falling. Fiscal and monetary policy has also stimulated the New Zealand economy, he said.

“We expect the economy to begin growing again toward the end of the year, but the recovery is likely to be slow and drawn out,” he said. “It could also be erratic. To many households it may not feel like a recovery at all, with lower employment, house prices and wage increases into next year.”

Households and companies need to go further in cutting spending to match slower income growth, he said. “It will take a long time to adjust balance sheets, especially for households.”“While they have largely stopped building up debt, most people have less wealth than before the recession started,” he said.

Bollard reiterated his concerns that short-term lending rates haven’t fallen as much as the official cash rate, now at a record-low 2.5%, rendering monetary policy less effective.“We are disappointed that banks have not passed on the April reduction in the OCR to short-term lending rates: they have an opportunity to help New Zealand's recovery by doing so,” he said.

“The broader tightening in financial conditions seen over recent months risks undermining the recovery before it becomes self-sustaining,” he said.

Bollard said there were risks in New Zealanders judging the recent stabilisation in house prices as evidence of another property boom, and borrowing more to increase spending.“Investors who rely on this could get hurt,” he said. “They could make it harder for businesses to invest in the export-led recovery we need.”

He also identified the spread of the H1N1 flu virus, known as swine flu, as a potential risk to recover.“It looks likely this will impact the economy by hitting staffing, through sickness, childcare and precautionary behavior,” he said. “If the incidence is severe, it would delay recovery."

Businesswire.co.nz

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