Debt, dollar and house prices too high, says Reserve Bank

The Reserve Bank would like to see the New Zealand dollar, house prices, and overall debt take a bit of a tumble.

The central bank’s biannual financial stability report, released this morning, says the country's overall financial system is sound and certainly much safer than it was two years ago.

But other themes in the report show large areas of concern about the country’s current financial conditions remain.

Although the central bank often foregoes invitations – particularly from journalists in search of a story – to comment on the New Zealand currency, the report has, scattered through its 50 pages, quite a bit to say about the dollar.

The main theme is that the dollar’s current values – it has been hovering around $US0.80 for some time now – do not reflect the realities of New Zealand’s economic conditions.

“Movements in commodity prices have been a major driver of the New Zealand dollar, which has remained strong against the US dollar despite weaknesses in the New Zealand economy and the recently cut in interest rates,” the report said.

“If commodity prices do fall in the future, the New Zealand dollar would be likely to fall, mitigating the resulting fall in exporter incomes.”

“While exports have been increasing, the degree of improvement has been more moderate than during some previous recoveries due to the relative strength of the New Zealand dollar on a trade weighted basis.

“A fall in the exchange rate would assist rebalancing by reducing the appetite for imports and supporting demand for exports and domestically produced tradeables,”

The report also says New Zealand house prices are “elevated” and although they have fallen 5% - 13% in inflation-adjusted terms – they are still too high.

And while debt levels have dropped, the country’s external liabilities – down from 85% of GDP to 80% - are still a threat to New Zealand’s long-term economic well being.

The debt position could also improve if the currency fell, the report said.

New Zealand debt is “overwhelmingly” denominated in New Zealand dollars or hedged into New Zealand dollars, which means a fall in the value of the currency would be a “useful shock absorber.”