Bollard warns against quake 'over regulation'

New Zealand should avoid costly 'over-regulation' - with increased safety standards coming at a cost - as a response to the Christchurch earthquake, says Reserve Bank Governor Alan Bollard. Photo / Geoff Sloan

New Zealand needs to avoid a costly regulatory over-reaction to the Christchurch earthquakes, though the central bank will intervene in the foreign exchange market if needed in response to a large earthquake in Wellington, said Reserve Bank governor Alan Bollard in a speech.

It would be inappropriate, all things being equal, for monetary policy to be stimulatory during the reconstruction period, Dr Bollard said in a speech to the Rotary Club of Wellington.

Disaster preparedness was necessary and desirable, but not costless, he said.

Increases in safety standards, such as seismic strengthening, can result in significant costs for an economy that linger long after the risks they aim to address have occurred. They can also create a complicated regulatory environment that may result in significant impediments for activity.

"The challenge here will be to avoid a costly regulatory over-reaction to a one-off event," Bollard said. Consistent with the Policy Targets Agreement, monetary policy does not react to such short-term price changes.

When the bank reduced the official cash rate by 50 basis points following the February earthquake that devastated Christchurch it described this as an insurance measure to avoid a significant and persistent deterioration in activity.

"We were conscious, however, that depending on wider economic conditions, this insurance would need to be removed as rebuilding, and a recovery in activity more generally, drew the economy's resources into production.

Bollard said a seismic assessment of the Reserve Bank's main office in Wellington in September found that the building would withstand an earthquake greater than the Christchurch earthquake.

"But even though our building could be standing after an earthquake, there is a risk that damage to surrounding buildings could make the Wellington office inaccessible," he said.

To ensure that the bank's core functions were maintained after a major earthquake in Wellington the bank had a dozen staff its Auckland office engaged in critical roles. The provisions of Reserve Bank Act provide for the delegation of key aspects of the governor's role to the Auckland office manager, with appropriate safeguards.

Bollard said the Reserve Bank spent time explaining the earthquakes in Christchurch in September last year and February this year and "that limited excessive financial market reactions".

"A bad Wellington earthquake with an epicentre in the nation's capital, could engender a more extreme financial market reaction, and it would be the Reserve Bank's role to intervene to ensure an orderly foreign exchange market if that proved necessary.

"If the country's political leadership and key administrative infrastructure were caught up in an earthquake, this could drive a bigger financial reaction, and make government policy responses much harder," he said.

He reiterated that the central bank had a working assumption of a $20 billion cost for the rebuild of Christchurch. This is equal to 10 per cent of gross domestic product.

"We recognise that there is considerable uncertainty around these numbers and revisions to this estimate are likely to continue for some time," he said.

Overall, about $150 million of extra cash was sent to Christchurch in the week following the February earthquake, representing about $350 per resident.

"We learned a lot about ATM configuration to ensure operability, and the internet was very useful to provide up to date information on ATM availability.

"Since that time however, monetary policy has had to account for a number of significant developments," he said. "These include the continuing sovereign debt concerns in Europe and related developments in financial markets. Business confidence appears to have now recovered well nationwide, and to a large extent also in New Zealand. We believe the cuts in the official cash rate assisted this."

Traders are betting Bollard will raise the official cash rate by 35 basis points over the next 12 months, according to the Overnight Index Swap curve.