Rising deficit ‘undesirable but not a huge concern'

The growing balance of payments deficit was an "undesirable" feature of an otherwise balanced economy, the central bank governor said yesterday.

However, financial markets were not particularly concerned about the level of the deficit because of their confidence in the economy, the currency and strong export prices, Reserve Bank of New Zealand Governor Alan Bollard told a parliamentary committee.

He said the deficit was increasing to a "significant level", with the bank forecasting it will reach 6.75 per cent of gross domestic product by 2007.

Bollard said the country's strong fiscal position was an offsetting factor to the current account deficit.

"Nevertheless it's still, I think, an undesirable feature and it's probably the one area of our economy that is not in a broad balance," he said.

He repeated that the level of the dollar, which reached a near 23-year high of US74.49c this month, was not out of keeping with the high commodity prices New Zealand was gaining for its exports.

"It's at high levels and, if you look historically at the relationship with commodity prices, you can see that when commodity prices are high the dollar is high, and it's maintaining that relationship," Bollard said after the meeting.

Asked whether the bank had considered intervening to limit the kiwi's rise, Bollard said that the bank saw intervention as a "limited option under specific circumstances".

Bollard said the economy was outperforming most other developed nations and that growth was expected to slow to 3 per cent over the coming year from 4.5 per cent.

- REUTERS