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Reserve Bank governor Alan Bollard said in a speech to a Hawkes Bay business audience this morning that early signs of global recovery have now emerged, and that we have avoided a repeat of the Great Depression.
However, world growth will likely be subdued for the next year or two, and the current low international interest rates, expansion of liquidity & central bank balance sheets, and fiscal stimuli will be necessary for some time, he said.
The key to New Zealand’s economic recovery now will be household savings, investment in the tradable sector, and deeper funding markets Dr Bollard said.
"New Zealand looks likely to start recovering ahead of the pack. But this is an opportunity to rebalance. Getting the sort of sustainable recovery we want will be assisted by: first, greater savings by the household sector, to reduce the need for foreign funding of the economy; second, investment in the economy's productive base, particularly in the tradable sector; and third, greater durability and depth in funding markets, including a lengthened maturity structure for bank funding.
"A clear risk over the medium term is that households resume their 'borrow and spend' habits before they have paid down some of their existing debt. This could be triggered by renewed moderate house price inflation, and needs to be avoided."
Getting households to save more would have the added advantage of creating a more stable source of funds for business investment and expansion - reducing reliance on foreign funding, which would contribute to more stable and lower interest rates.
If, or when, stronger world demand and a weaker New Zealand dollar eventuate, it would be the signal that investment needs to move to the tradable sector to help correct the current account gap.
"We hope that, in the next phase of recovery in financial market sentiment and return of risk-seeking, the markets will be more discriminating about New Zealand," Dr Bollard said, in another message to the foreign exchange holders who stubbornly refuse to let the New Zealand dollar slide enough to lead an export-driven recovery.
The Reserve Bank understood that interest rates are a blunt instrument to curb excessive borrowing, and "We see prudential policy potentially playing a greater role in the future", Dr Bollard said, in reference to New Zealand banks’ newly increased liquidity requirements.
The Reserve Bank’s focus is beginning to shift to keeping inflation expectations anchored, the macro-economy stable, system liquidity available and the financial system stable, so that funds keep flowing and relative price signals work during the nascent recovery.
"The New Zealand economy has taken knocks in this crisis, but some form of recovery is now on the horizon. Our opportunity is to use this time to rebalance the economy for the medium term”, Dr Bollard said.