KEY POINTS:
Reserve Bank of New Zealand governor Alan Bollard made the unusual call this morning for banks and businesses not to hibernate in the face of tighter credit markets and talk of an economic slowdown.
He said he would be disappointed if businesses held back on quality investment because of credit constraints, adding many people seemed to have forgotten what a slower economy looked like.
His comments come a day after the NZ Institute of Economic Research's Quarterly Survey of Business Opinion showed plunging business confidence, with companies intending to raise prices as profits are squeezed.
Today Dr Bollard told the Marlborough Chamber of Commerce that the New Zealand economy remained fundamentally sound and creditworthy.
Banks should avoid overreacting to the economic downturn, he said.
But he also suggested that wage-bargaining parties should not assume tight labour market conditions would continue as the economy slowed.
"Banks, businesses and households alike need to recognise the new external environment and adopt a cautious approach - but don't go into hibernation, the underlying economy remains robust," he said.
New Zealand had experienced a record period of uninterrupted growth that had left the economy stretched.
Dairy prices had been strong and the Government's fiscal policy was more expansionary this year, adding to inflationary pressures from fuel and food prices, Dr Bollard said.
He repeated earlier messages that wage pressures remained high, and in 2009 and 2010 there would be a significant boost to inflation from the emissions trading scheme.
"For these reasons monetary policy in New Zealand has been relatively tight for some time, with a current Official Cash Rate of 8.25 per cent.
"This leaves us in a better position than some northern hemisphere countries that may still have to confront future inflationary pressures," Dr Bollard said.
The Reserve Bank expected the New Zealand economy to see a markedly weaker growth profile this year because the housing market was now softening, as it needed to.
Also, the continued high New Zealand dollar was constraining export receipts, and dry weather this summer had hit dairy and meat volumes.
So far, the significant financial market disruption in the northern hemisphere was having only a limited effect on the economies of this country's trading partners, with the exception of the US, he said.
"This does not look like unusually weak world growth, and indeed the continued strength of Australia and Asia is an important continued growth driver for New Zealand."
But the disruption in financial markets had seen funding costs rise and credit conditions tighten in New Zealand and Australia, Dr Bollard said.
New Zealanders were seeing the effects of this through effective mortgage rate rises and reduced corporate credit availability.
It would be disappointing if New Zealand businesses slowed quality investment because of credit constraints.
While there had been a lot of pessimistic commentary in the media, the Reserve Bank saw events as a cyclical adjustment, he said.
"Because we have been so strong so long, some people have forgotten what a slower economy means."
- NZPA
