High kiwi dollar hampers rebalancing of economy

Friday 9th October 2009

The resilient New Zealand dollar, which is trading above 74 US cents, is hampering a rebalancing of the economy toward the export sector and away from debt-fueled consumer spending, says Reserve Bank Governor Alan Bollard.

While New Zealand escaped major damage from the world’s financial crisis, the situation “highlighted imbalances and vulnerabilities” in an economy where households had been spending more than they earned and foreign debt climbed, Bollard said in a statement accompanying the central bank’s annual report today.

“The recent appreciation of the exchange rate has not supported the shift towards the export and import-competing industries that will be necessary to improve this situation,” Bollard said. "On these trends, there is a real risk that recent improvements in the external balance will be reversed."

The kiwi dollar climbed to as much as 74.51 US cents today, a new 14-month high, and recently traded at 74.21 cents. The central bank has the ability to intervene in currency markets in response to wild or unjustified swings in the kiwi dollar, an option it has used very sparingly. Still, Bollard often finds ways to signal concern about unhelpful movements in the currency.

“In the past two years there has been a substantial correction in household savings and the external payments imbalance,” he said today. Still, “further improvements will be needed to stop our international debt position from mounting further."

He said the financial crisis has shown that central banks and market regulators need better tools to regulate financial systems over the economic cycle, including stronger liquidity and capital adequacy standards.

The central bank’s total assets grew by about $6 billion to $31 billion in the 12 months through June 30. Declining interest rates and exchanges rates during the year helped the central bank deliver an annual net profit of $906 million and paid the government a dividend of $630 million.

Bollard said the result "reflects abnormally large changes in market conditions" that may not be repeated in coming years.

Bollard, his deputy and the two assistant governors “requested they be given no remuneration increase in calendar year 2009,” the statement said.

Businesswire.co.nz

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