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Lifting national savings rate best way to drive down kiwi, RBNZ's McDermott says

Friday 22nd November 2013

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Reserve Bank assistant governor John McDermott says lifting the country's savings rate will help reduce New Zealand's reliance on foreign funding and ultimately drive down an over-valued kiwi dollar.

The local currency is overvalued in both nominal and real terms, which is hindering the export sector's profitability and general business strategies, and an important issue in driving its strength has been the persistent gap between savings and investment, McDermott told rural lobby group Federated Farmers in Wellington today.

That's because New Zealand has to rely on international funding to pay for local investment, which pushes up interest rates and the exchange rate. The kiwi rose to 82.29 US cents from 81.91 cents immediately before the speech.

"Since the savings and investment gap plays a prominent role in New Zealand's exchange rate story, it seems reasonable to suggest that it will be necessary to tackle our reliance on foreign savings to finance our consumption and investment," he said.

"Addressing the residential investment needs of a growing population and increasing the incentives for private sector savings, such as the tax treatment of investment income and issues around the long-term design of public and private pension systems, are the sorts of issues that need to be debated to see what would work best in New Zealand," he said.

In its September forecasts, the Reserve Bank estimated New Zealand's household saving rate was negative 1 percent of disposable income in the 2013 March, and this month said gains in private savings were under threat by increased appetite for credit.

In its 2010 submission to the government's Savings Working Group, the central bank advocated consideration of the Nordic tax system, where tax on savings and investment is lower than on labour, linking the tax treatment of interest to inflation and investigate ways to reduce government incentives for KiwiSaver without putting people off as ways to lift the national savings rate.

The country's net international position was a deficit of $151.3 billion as at June 30.

McDermott said the bank does intervene in foreign exchange markets from time to time, though doing so "is unlikely to have a sustained impact in lower the exchange rate," he said.

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