Bollard calls for exchange rate stability

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard issued a warning to foreign exchange markets today, saying they need to differentiate between New Zealand and Australian economies.

Financial markets and businesses needed to appreciate the different futures the two countries were charting out of the global financial crisis, Bollard said today.

Speaking to the trans-tasman business circle in Auckland, he said both countries had survived the crisis well, due to a mix of strong institutions and stimulative policies.

"However, their immediate prospects are different. Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth," Bollard said.

"New Zealand has had a recession, and the pick-up is slower and more vulnerable - a difference financial markets do not appear to appreciate.

"This is particularly evident in the relatively stable cross-rate on foreign exchange markets. If financial markets can't see the differences, they will eventually lose money, and it will hurt the New Zealand economy."

Bollard said New Zealand could improve its prospects by taking advantage of Australia's "very strong" future growth potential.

"Australia is a lucky country, but we could be a lucky neighbour," Bollard said.

Australia was entering a new minerals boom, investing heavily and encouraged by new finds, re-opening markets, bottlenecks and strong prices. Strong investment and export growth would mean big challenges for Australian policy.

"This all means an economy that looks less like New Zealand."

But Australia's potential raised the prospects for New Zealand's manufacturers and services, which had a bigger share of exports than the same sectors in Australia.

"Australia will likely be a very strong growth market, and could help New Zealand to indirectly benefit from East Asian growth. Less inflation pressure here will help our competitiveness, assisted by relative exchange rate stability and the spreading single economic market.

"New Zealand and Australia have very different resource endowments, financial markets treat us like Australia, but actually we are quite different. We talk about catching up with Australian incomes, but we have better chances of taking advantage of their growth."

Bollard's words appeared to have a small immediate impact on the cross-rate, with the NZ dollar easing from A79.55c to A79.40c around the time the comments were released. The kiwi had already slipped from around A79.75c earlier today when unemployment figures came out.

- NZPA