Bollard says interest rates returning to normal levels

By NZPA

Friday 24th January 2003

Reserve Bank Governor Alan Bollard expanded today on yesterday's decision to leave interest rates static, saying people needed to remember that interest rates had simply recovered to more normal levels.

Speaking to Canterbury's Chamber of Commerce, Dr Bollard answered exporters who have called for interest rates to come down due to the strengthening kiwi dollar.

Explaining factors behind the recent rise in the kiwi, Dr Bollard said New Zealand's official cash rate -- currently 5.75 percent -- was currently low by historical standards, and had only dived below this on three occasions in the last 20 years.

"Some, of course, would suggest that we should be more active and should adjust the OCR, not just to offset the dampening impact of the exchange rate, but to try actively to reverse, or slow, the rate of increase in the exchange rate."

In this case, he said, things were returning to normal "pricing New Zealand assets and products more sensibly, albeit adjusting more quickly than is comfortable".

Dr Bollard noted that while monetary policy had an influence over short-term interest rates for a short time, long-term influences were New Zealanders' willingness to save and their appetite to borrow.

New Zealanders' appetite for debt had increased significantly in the past few years and "only when that changes will our interest rates settle, on average, around the level of those in other countries".

Exporters have been particularly concerned about the kiwi's appreciation against Australia's currency, which is hovering around seven year highs.

Dr Bollard acknowledged that the speed at which the dollar had risen had been sharp.

"Validly or otherwise, markets have taken the view that the New Zealand economy is growing more robustly than Australia's at present."

But some likely reasons included New Zealand's higher interest rates and a trend that when both currencies were rising, the kiwi tended to go a little further -- "perhaps something to do with our smaller size and less liquid markets".

The rise against the US dollar had been partly because the US dollar had been overpriced, New Zealand's economy had been stronger, its current account deficit had been low, and there had been an increased appetite for solid, secure fixed income returns.

"In trade-weighted terms, our exchange rate has now risen by around 20 percent since the end of 2001; one of the largest 12 monthly changes that we have seen in the 18 years since the exchange rate was floated.

"It is important to put it in context, though: even after a striking 30 percent rise against the US dollar, that exchange rate is still only now around its average levels for the last 10 years.

"On a trade-weighted basis, the exchange rate is now only a few percent above its long-term average."

In response to exporters concerns, Dr Bollard said it was important to note that dynamics had changed somewhat between New Zealand's growth, inflation and the exchange rate.

For example, he said, prices seemed to be less responsive to exchange rate movements than they were 15 years ago.

"Suppliers seem to be absorbing more of the impact of cyclical fluctuations in the exchange rate.

"And as an increasing proportion of our exports are moving up the value chain, our firms are getting a little more pricing power themselves, and hence are less immediately exposed to the effects of exchange rate fluctuations."

However, he acknowledged that exchange rates still played a big part of New Zealand's short-term fortunes as a trading nation.

For yesterday's interest rate review, Dr Bollard said the bank had looked closely at what had driven the exchange rate and concluded that the kiwi dollar's recent rise, if sustained, would dampen economic activity.

Unexpectedly robust spending by domestic consumers and strong housing and construction were placing pressure on the other side, however, leading the bank to leave the official cash rate tentatively where it was but with an acknowledgement that the balance of risk had shifted.

"We will need to look closely at the data over the next few months, for evidence that points to reduced pressure on resources and medium-term inflation," Dr Bollard said.

"If that evidence emerges and if the exchange rate remains at around current levels, or even rises further, there may be scope for a cut in the OCR later in the year."

Comments from our readers

No comments yet