Economy back on track, says Bollard

Alan Bollard

Reserve Bank governor Alan Bollard said today the economy was again responding to the monetary control rudder after a period in which "global crosswinds" had reduced its effectiveness.

"We have control of our ship," Dr Bollard said in speech notes for a speech to the Association of Superannuation Funds in Auckland.

Questions were raised about the effectiveness of monetary policy when the bank raised interest rates nine times between the start of 2004 and the end of 2005, but house prices and the domestic economy continued to boom.

That prompted Finance Minister Michael Cullen to request the bank and Treasury to see if monetary tools other than interest rates could be used to help the bank get greater control of the monetary conditions. In the event they found none.

Dr Bollard said even if the local economy and monetary policy was out of sync with influential overseas economies, "there is no question that we can run an independent monetary policy".

The bank had sometimes to modify its chosen course.

New Zealand's interest rates were now more in line with other countries, such as the United States, that had hiked rates to contain booming economies.

Meanwhile, New Zealand rates had been left near the highest in the developed world despite negligible economic growth because of persistent inflation.

As the global rates came up to meet New Zealand rates, monetary policy was increasingly effective, Dr Bollard said.

It was clear that in a globalised world most of the Government's economic policies, including fiscal, industry and immigration policies, were all constrained by other countries' policies and by international pressures on them, he said.

Dr Bollard argued that international pressures had delayed the effectiveness of monetary policy, rather than negated it.

He said a series of unusual circumstances had reduced the effectiveness of the 2004-2005 tightening cycle.

The aftermath of the Asian financial crisis, the tech boom and bust, 9/11 and the growing power of globalisation had all contributed.

While the New Zealand economy was growing strongly due to strong and rising commodity prices, the central banks of other major economies were cutting rates radically to prop flagging economies.

"New Zealand has never in recent years had to run monetary policy in an environment where the G3 economies - the US, Japan and Europe - were running such loose monetary policy of their own."

Despite the onset of a tightening phase, local long-term interest rates aligned to global rates and households switched to fixed mortgages and continued to borrow against rising house prices.

Dr Bollard said the beginning of 2006 marked a turning point.

The tightening cycle ended, New Zealand's terms of trade started to soften, other OECD monetary policies started to catch up and the New Zealand dollar trade weighted index fell by around 18 per cent between December 2005 and June 2006.

At the same time the 'pipeline effects' of higher interest rates were being felt.

"This marks a rebalancing of economic growth from domestic sector-driven to export-driven. In this stage of the cycle our monetary policy has become a more effective brake on domestic spending."

Dr Bollard said there was no reason why the delayed economic response to monetary policy could not recur.

- NZPA