Thursday 8th December 2011 1 Comment
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New Zealand could be in for a torrid time if European legislators can’t reach agreement to sort out their debt woes at tomorrow’s leaders’ summit, the Reserve Bank says in this morning’s monetary policy statement.
The central bank’s central projection is for a “moderate downturn in global activity,” though the risks around that have increased “significantly,” it said in a special commentary painting an alternative scenario in the December monetary policy statement.
“A sharper-than-expected contraction in euro-area activity would materially reduce activity in other regions, including Asia and Australia,” the bank said. “This would occur as a result of a marked deterioration in financial conditions, global trade and commodity prices.”
European leaders meet on Friday in Brussels in a bid to hammer out a deal that would integrate the region’s economies more closely and impose tougher controls on government spending.
Markets are optimistic a concrete proposal will be reached after European power-brokers French President Nicolas Sarkozy and German chancellor Angela Merkel reached accord in a pre-deal meeting on Monday. If a deal isn’t cut, a big sell-off in the market is expected, and 15 European nations face sovereign credit rating downgrades, including triple-A rated France and Germany.
The central bank said a deeper downturn would sap New Zealand’s economic growth, which has already had its forecasts downgraded by the Treasury and Reserve Bank, with weaker demand for local exports and lower prices for the nation’s commodities. “There would also be a reduction in domestic demand, with particular weakness in business investment spending,” it said.
That would heighten investors’ aversion to higher-yielding, riskier assets and could exacerbate tight funding markets. “Such conditions would necessitate a significantly different monetary policy response than is assumed in the central projection,” the bank said.
“In such circumstances, it would be appropriate for monetary policy to remain supportive for an extended period, even as the reconstruction in Canterbury boosts demand.”
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