Bollard speaks out on 'imbalanced world'

Alan Bollard

Making one of his rare public appearances, Reserve Bank governor Alan Bollard today warned about global economic imbalances and how changes in the world economy could impact on New Zealand's economic performance.

In a speech to the Canterbury Employers' Chamber of Commerce in Christchurch today, Dr Bollard said high savings countries were currently funding low savings countries, and at some point there would need to be an adjustment to these imbalances.

"Exactly how this plays out is ... unclear, although history tells us it is likely to involve a realignment of exchange rates and interest rates as well as changes in household and business spending patterns."

New Zealand falls into the low savings category, due in large part to New Zealanders' plowing most of their money into property. Dr Bollard said a 2005 study by the OECD suggested houses were above fair value in most countries.

He said booming property markets had led to increased household debt levels, which had contributed to deteriorating savings rates, investment imbalances and widening trade and current account deficits.

Dr Bollard said climbing house prices had raised the issue of how monetary policy should respond to asset price movements.

He said it was tricky for the Reserve Bank to target the housing market as house prices could show quite different regional trends, and it was sometimes hard to see house price misalignments at the time.

"Targeting the housing market directly may also be inconsistent with meeting inflation objectives, and could lead to unnecessary volatility in output, employment and interest and exchange rates," Dr Bollard said in speech notes.

He has used monetary policy to try to curb consumer spending and dampen the property market over the past two years. He has raised the key interest rate nine times since January 2004. But yesterday he indicated the tightening cycle could be at an end, as he kept the official cash rate steady at 7.25 per cent.

Dr Bollard also spoke today of the significant economic costs of external events such as terrorist attacks, natural disasters such as the Boxing Day tsunami in Asia, and outbreaks of diseases such as Sars and Avian flu.

Dr Bollard said monetary policy has a potential role to play in managing the external shocks that could affect the New Zealand economy, but he said monetary policy was not a panacea to every external or domestic event that could occur.

He said how monetary policy would change in the face of an external event would depend on the nature of the shock, its duration and how well the effects could be identified.

"Given the complexity of the economy and the nature of these sorts of shocks, it is simply not possible to be prescriptive in advance."

Dr Bollard also touched on the impact of integrating China and other emerging markets with large labour reserves into the global economy.

"Ultimately our future performance will depend on our ongoing relative competitiveness."

- NZPA