Bollard Says New Zealand May Recover Before Partners
Written on July 14, 2009
New Zealand’s economy is likely to start recovering earlier than many of its trading partners, Reserve Bank Governor Alan Bollard said.
“Early signs of a global recovery have now emerged,” Bollard said in notes for a speech delivered today to a business audience in Napier. “New Zealand looks likely to start recovering ahead of the pack.”
Bollard said last month that New Zealand’s economy will start growing in the final quarter of this year, ending the worst recession in three decades. He said he is likely to leave the benchmark interest rate at a record-low 2.5 percent until late 2010 because the economy needs further stimulus.
“Times are tough but we are now seeing the first signs of recovery,” said Brendan O’Donovan, chief economist at Westpac Banking Corp. in Wellington. “The economy is turning the corner after 18 months of misery.”
Westpac expects the economy will grow 2.6 percent next year, more than twice the pace it forecast in April, according to a report published today. New Zealand’s main trading partners will expand 2.1 percent in 2010, it said.
New Zealand’s recovery will be an opportunity to encourage greater savings among households and more investment in the productive sector to bolster exports, Bollard said today. His speech notes were posted on the central bank’s Web site.
House Prices
A risk to the pace and balance of the recovery is that households will resume their “borrow-and-spend” habits before they have paid down debt, Bollard said.
“This could be triggered by renewed moderate house-price inflation and needs to be avoided,” he said. “Reliance on past experience of strong house-price inflation and easy credit will be untenable same day cash advance.”
Investment in export-producing industries will be encouraged by stronger world demand and a weaker currency, Bollard said.
New Zealand’s dollar has gained 17 percent against the U.S. dollar in the past six months, curbing exports which make up 30 percent of the economy. The currency bought 63.36 U.S. cents at 11:55 a.m. in Wellington from 63.26 cents immediately the speech was released.
“What is needed is for the New Zealand dollar to be persistently weak over the coming years, to encourage the needed business investment to be export oriented,” Bollard said.
‘Unhelpful’
“Over coming quarters, it may be the case that the exchange rate will be ‘corrected’ to weak levels if the financial markets reappraise its appropriate level in light of our imbalances relative to our trading partners.”
Recent gains in the exchange rate have been “unhelpful,” he said. “History shows that the financial markets cannot necessarily be relied upon to focus on New Zealand’s case relative to other economies in a timely and finely tuned way, and price the New Zealand dollar accordingly.”
Bollard said the central bank will continue to set interest rates in a way that will bolster the economic recovery. It can also use prudential policy as a way of constraining excessive misdirected borrowing and lending behavior, he said.
Tools such as setting minimum capital requirements for lenders may be a means of avoiding economic booms and busts, he said.
Filed in: finance.