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Bollard Warns About Markets, Banks About Recovery

Fuseworks Media
Fuseworks Media
Alan Bollard. Pic: NZPA
Alan Bollard. Pic: NZPA

Wellington, June 17 NZPA - Reserve Bank of New Zealand Governor Alan Bollard today tried to talk down the NZ dollar and talk banks into cutting interest rates, but analysts do not expect "bank bashing" to work.

"If markets are buying the New Zealand dollar on the expectation of a strong recovery, they may end up being disappointed," Dr Bollard told a Wellington business audience.

He also said banks have "an opportunity to help New Zealand's recovery" by passing on official interest rate reductions.

The NZ dollar has risen as the US dollar has weakened in recent weeks and interest rates have also risen even though the central bank kept its official cash rate unchanged in its Monetary Policy Statement.

Economists have said there has been an effective tightening in monetary conditions, which could choke off an economic recovery.

Banks have been criticised for not passing on all of the cuts in the official cash rate to mortgage holders and business borrowers in New Zealand.

"Overall, we think the broader tightening in financial conditions seen over recent months risks undermining the recovery before it becomes self-sustaining," Dr Bollard said.

Annette Beacher, senior strategist at TD Securities, said it was not surprising Dr Bollard had resumed bank-bashing.

"Unfortunately, lower bank margins will not save the ailing export sector, a lower for longer currency is needed.

"The RBNZ may find it needs to do more than deliver speeches," she said.

Dr Bollard said that given the uncertainties surrounding the recovery, it was important that fiscal and monetary policy operated effectively, he said.

For the New Zealand recovery and subsequent expansion to be strong and long-lasting further economic rebalancing was needed.

"Growth needs to be export and investment led, rather than consumption led. Household and government consumption need to be more restrained. Saving needs to increase, and the current account deficit needs to reduce.

"However, some recent financial market developments, especially the recent upward pressure on the New Zealand dollar, are working against this rebalancing."

He said the central bank was disappointed that banks had not passed on the April reduction in the official cash rate to short-term lending rates.

"They have an opportunity to help New Zealand's recovery by doing so," he said.

Parliament's finance and expenditure select committee hasn't made up its mind on whether it should hold an inquiry into the difference between the official cash rate (OCR) and interest rates charged by banks and said today it would seek further information from the Reserve Bank and "appropriate advisers".

Dr Bollard said the recovery would be slow and erratic and may not "feel like a recovery" to some households.

Households, businesses, banks and policy-makers should be thinking how they can influence the recovery and ensure it is sustainable, he said.

Activity in New Zealand was near its low point, the global economy appeared more stable and trading-partner growth forecasts had stopped falling. New Zealand's large fiscal and monetary policy stimuli had bolstered domestic activity.

"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. 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."

An adjustment to falling asset prices and tighter credit had further to go.

"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.

"This shock has been so big the nature of the recovery is hugely uncertain, here and overseas."

Moreover, the world was now being swept by swine flu.

"It looks likely this will impact the economy by hitting staffing, through sickness, childcare and precautionary behaviour. If the incidence is severe, it would delay recovery."

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