Strong kiwi dollar holding back economic rebalancing, Bollard says

Wednesday 10th November 2010

Reserve Bank Governor Alan Bollard led with his jaw in the latest financial stability report, saying the strong kiwi dollar is holding back the rebalancing of the economy, though the country’s financial system is improving.

“The New Zealand dollar remains relatively high, reflecting easy monetary conditions and weak economic activity in the major developed economies,” Bollard said in Wellington. “If sustained, this will make the continued rebalancing of economic activity towards the tradables sector difficult to achieve.”

Local households have been rebalancing their balance sheets faster than anticipated as they repay debt instead of ramping up spending in a low interest rate environment. While that’s kept the local recovery muted, it’s helped improve New Zealand’s poor private savings record. This has been aided by a boost in export income from higher commodity prices, though offset from higher government borrowing.

Bollard’s jawboning comes in a week where the kiwi touched above 70 on a trade-weighted basis, a level it broke when the central bank last intervened in currency markets. Most of that’s been driven by a weak US dollar, which investors eschewed in preparation for the Federal Reserve’s second round of printing money.

The kiwi traded at 78.15 US cents from 78.34 cents immediately before the report was released to be little changed from yesterday, and 69.13 on the trade-weighted index of major trading partners’ currencies from 68.91 yesterday.

Earlier this week, Prime Minister John Key, a former currency trader at Merrill Lynch, said he thinks the kiwi will “probably go a little bit higher” than 80 US cents. Still, the central bank said the TWI has been stable over the past six months in spite of the large swings in bilateral exchange rates.

Bollard said New Zealand’s financial system has benefited from the global recovery, particularly in Asia, and local banks are better positioned to meet future credit demands.

European sovereign debt concerns, which reared their head this week amid reignited fears over Ireland’s ability to repay investors, and America’s US$600 billion of more asset purchases meant there were still risks to the global economy.

“These appear to be supporting risk asset markets, but they are also putting pressure on capital inflows and exchange rates in third country economies, which is problematic for international rebalancing,” Bollard said.

The bank’s November financial stability report said Asian and Australian policymakers are concerned about parts of their economies overheating, especially real estate, with property prices looking stretched across the region.

New Zealand banks’ troubled loans appear to have reached a plateau, and remained “much lower than in the 1990s recession and much lower than banks in many other countries,” the report said.

Still, the central bank expects improvements in asset quality will lag economic activity, and credit conditions will stay tight for small- and medium-sized businesses and the agriculture sector.

Westpac, Bank of New Zealand, and ANZ boosted their bottom lines over the past year as they slashed their provisioning for dodgy loans.

Deputy Governor Grant Spencer said the non-bank deposit taking sector will probably go through more consolidation as new prudential requirements come into effect next month.

The collapse of South Canterbury Finance, which made a $1.6 billion call on the government’s retail deposit guarantee, and Allied Nationwide Finance, the lending unit of Allied Farmers, further dented investor confidence in mezzanine lenders.

Spencer said insurance companies will soon come under the central bank’s regulatory purview after legislation was passed in September, and will have to meet new solvency and reporting standards.

The central bank said the Canterbury earthquake probably won’t cost local insurers too much, with most firms electing to reinsure most of the risk of natural disasters, though there might be upward pressure on reinsurance premiums in the long term.

Businesswire.co.nz

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