KEY POINTS:
The New Zealand central bank has been cautious in tightening rates so as not to push up the NZ dollar, but will keep using its official cash rate as its chief monetary tool, the governor of the Reserve Bank of New Zealand said today.
Alan Bollard said a disproportionate amount of a global glut of cheap money had found a home in New Zealand and funded domestic consumption and investment, at the same time undermining the impact of the Reserve Bank's monetary policy.
He said in speech notes prepared for the Wellington Chamber of Commerce that higher official rates would however become a more potent tool the more indebted households become.
He repeated comments made last week that the official cash rate would remain the central bank's main monetary policy tool, but it would continue to search for other measures that might help curb inflation without affecting the currency.
Possible options included a tightening of the tax rules for property investment and increasing the amount of money banks must hold as reserves.
He said the central bank had not wanted to add to the upward pressures on the New Zealand dollar and because of this it had not been as aggressive with its monetary policy in recent years.
"We have been more cautious in our OCR tightening path than might otherwise have been the case," he said.
Last week, the Reserve Bank raised its official cash rate by a quarter point to 7.5 per cent after a 15 month lull because of concern about inflation pressures from a robust domestic economy and strong housing market.
It also warned of further rises if there were no clear signs of a cooling in the housing market.
Bollard said it could be there would be no sustained retracement in the New Zealand dollar until domestic inflation pressures were reined in.
At some stage markets would return to a more normal state and local investors and consumers needed to be wary of the impact.
"New Zealanders need to think about other eventualities ahead, and in some cases show less exuberance," he said.
Bollard said countries running large currency account surpluses and oil exporters were among the sources of the large amounts of cheap liquidity, which could not be controlled directly by central banks.
Recent market volatility was a reminder of the possible fallout when investors become risk averse, he said.
- REUTERS
