Households need to do more, says Bollard

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

New Zealanders should be doing more to address economic imbalances, especially external debt, the Reserve Bank says.

Governor Alan Bollard told the Wellington Chamber of Commerce today that New Zealand has taken action to address some of its imbalances, but households and banks can do more to reduce risks inherent in the external imbalance.

Households remained the most obvious source of imbalance, with balance sheets heavily skewed to housing, high debt ratios and very low savings, he said.

Resilience of bank funding had been bolstered by a liquidity policy imposed by the Reserve Bank, and Government accounts have a credible and improving, but balances sheets were still heavily skewed towards housing, he said.

"We believe New Zealanders have decided they are over-exposed to property assets and to high debt, and they are prepared to constrain consumption to improve their savings. The question is how much rebalancing they contemplate, and for how long," he said.

ANZ senior markets economist Khoon Goh said the key message from the speech was that New Zealanders should adjust their behaviour
voluntarily, or "risk having the adjustment forced upon us at some stage down the track".

"Reading between the lines, the Governor would like to see households continue to save more (not in housing), spend less, and do it all in a voluntary fashion."

Higher returns for bank deposits and a rising interest rate track would help, Goh said.

On the external account, the trade balance had improved with strong export prices and less demand for imports from consumers, farmers and businesses, Bollard said.

However a large deficit on the investment income balance was showing no signs of "enduring improvement", and the strong New Zealand dollar had not helped, he said.

It would be difficult to improve this metric as it would require New Zealand to get its net external debt on a downward trend, he said.

"The financing consequences of years of running external deficits mean that foreigners have more than twice as much invested in New Zealand as we have invested overseas," he said.

"Our net external liabilities cannot keep increasing with impunity," he said.

"Ultimately, either the markets will penalize us by requiring a larger premium for its continued funding, and/or the sheer size of servicing our obligations will become an intolerable burden to the country."

Rather than await such painful punishments New Zealand should be looking to improve the situation, Bollard said.

While some of the imbalances were out of New Zealand's control, including the valuations of some major currencies, a lot could and was being be done, he said.

"Ultimately, however, it is up to New Zealanders to improve the quantity and quality of household savings," he said.