Brian Fallow: Good news, bad news

The dollar is unpleasantly high already, Bollard is indicating. Photo / Martin Sykes

Well, he can't say fairer than that.

Governor Alan Bollard has lowered the forecasts track for interest rates over the next couple of years compared with where he was in September - and that had been a significant downward revision of his view of the outlook for growth and rates.

But if the good news is that the Reserve Bank expects rates to be lower for longer, the bad news is why it thinks that.

It is expecting weaker growth in the near term, although that is offset by somewhat higher growth from later next year. That will come for the earthquake-related building work in Canterbury and the benefits of higher export commodity prices - eventually - flowing through the economy.

In the near term, however, the picture is one of continued caution and debt reduction on the part of households, businesses and farmers.

Households face ongoing weakness in the housing market - the bank expects house prices to drift off another 1 per cent over the next six months - and signs of moderation in employment growth.

It is unconvinced by recent pickup in business confidence as reflected in the National Bank's monthly survey and is waiting to see the colour of firms' money, so to speak, in the form of a lift in business borrowing.

Farmers are enjoying better prices, but many especially in the dairy sector have more debt that they are comfortable with, and there have been a series of regional shocks - a cold wet spring in the south, destruction of rural infrastructure in the Canterbury quake, PSA in kiwifruit districts and now drought in Northland and possibly further afield.

Bollard also delivered a clear message to the Government, echoing that from across the road at the Treasury: "Accelerated elimination of New Zealand's fiscal deficit would help improve national savings, thereby easing current pressure on interest rates and the New Zealand dollar."

That is code for: The dollar is unpleasantly high already. If monetary policy has to work harder as the economy recovery because fiscal policy is too loose, it is the export sector which will pay the price. And that is dangerous.