Bollard sends out second 'borrow and spend' warning to households

Tuesday 14th July 2009

Reserve Bank of New Zealand Governor Alan Bollard issued his second warning in as many months for households to rein in their spending and boost savings to help rebalance the economy as it comes out of its longest recession in 30 years.

The country’s economy “looks likely to start recovering ahead of the pack,” but for it to be sustainable, it will need greater household savings, reduced reliance on offshore funding, investment in the tradable sector, and more stability in funding markets, Bollard told a business audience in Hawke’s Bay.

He backed off trying to jawbone the kiwi down, conceding it was up to financial markets to promote a weaker dollar. The currency climbed as high as 63.40 US cents after the speech was released from 63.19 cents immediately before and recently traded at 63.38 cents.

“The New Zealand economy has taken knocks in the crisis, but some form of recovery is now on the horizon,” he said.

“The onus on households to constrain their spending and repair their balance sheets, and limited scope for additional government spending, suggests the New Zealand recovery is likely to be gradual and fragile by our own historical standards,” but it will probably be stronger than those of our developed trading partners, he said.

Last month, Bollard said economic activity in New Zealand was “near its low point,” but the rebalancing of the economy was under threat from the resilience in the currency, which has climbed some 29% since falling below 50 US cents in March.

The central bank expects government spending will require “significant” consolidation once the economy regains its footing, with the ageing population likely to put “considerable strain” on the taxpayer in the coming decades.

“Private savings plans will need to take account of these pressures in the future,” he said.

An aging population is a major issue for the global economy, and in its May Budget, New Zealand’s government suspended contributions to the Superannuation Fund, a separate fund to KiwiSaver, set up to help meet future payments to government pensions.

New Zealand implemented the KiwiSaver scheme in 2007, and topped one million members long before the 2015 target date with its compulsory opt-out structure cited as one of the reasons for its success.

The National-led government cut the minimum contribution rate to 2% from 4% of an employee’s wage when it came to power last year.

While Bollard raised the prospect of another property boom as a risk to the economy that could lead to increased spending and greater debt in his June statement, he made little mention of the signs of stabilisation in the property market in the latest QV Valuation and Real Estate Institute data releases in the past week.

Sue Trinh, senior currency strategist at RBC Capital in Sydney, said the central bank was wary of a rebound in the housing market, and doubted Bollard will cut the official cash rate lower than 2.5%.

Global interest rates will need to rise from their current stimulatory levels as the worldwide economic slump eases to avoid another credit boom or a period of sustained inflation, Bollard said.

He said interest rates were a blunt instrument to curb borrowing, and expected to see prudential policy playing a greater role in monetary policy settings, by offering “a more direct approach to constraining excessive or misdirected borrowing and lending behavior.”

Parliament’s Finance and Expenditure aired concerns about the potential undermining of the central bank’s main tool in a report tabled last week, and is seeking “further careful consideration” on the issue.

Businesswire.co.nz

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