The Reserve Bank’s Financial Stability Report, its six-monthly health check of the financial system, highlighted the risks around New Zealand’s economic recovery and shed some valuable light on a few important issues.
The international environment has come a long way since the last report in May. Most major economies have either resumed growth or are not far from it, confidence has improved, equities are soaring, and credit markets are back in action. The RBNZ notes that this turnaround has been partly fuelled by fiscal and monetary stimulus, which can’t be kept in place forever. On the other hand, policymakers have pledged to keep this stimulus in place until it is clearly no longer needed – which raises interesting questions around how they will know when to start easing back.
New Zealand’s economy has also begun to grow, and the improving global environment will support this progress.
However, the RBNZ’s concerns about imbalances loomed large again. The economy remains heavily reliant on overseas funding, and its exposure to international markets rose in the years leading up to the global financial crisis.
The RBNZ noted that there has been some progress in reducing this vulnerability recently, but that the high NZD is not conducive to a lasting improvement in the current account deficit.
Governor Bollard noted that to assist the improvement in New Zealand’s international debt position “we need to ensure there is no return to a debt-fuelled housing cycle, which would inevitably bring with it further exchange rate pressure and erosion of competitiveness”, elaborating that “if necessary the RBNZ would act to prevent this debt build-up”. That can only mean higher interest rates, regardless of whether they’re induced by OCR hikes or by other measures such as tighter restrictions on bank lending.
