Bollard: taking the foot off the accelerator

"New Zealand has been fortunate in some respects, allowing most of our crisis liquidity and guarantee measures to be terminated. Conventional monetary policy will now guide the stages of recovery," says Dr Bollard.

In the Official Cash Rate Review last week the Reserve Bank (RB) noted: '...we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.'

Dr Bollard says the RB used the words 'begin removing stimulus' deliberately as the official cash rate is at an historically low level of 2.5% and it is clearly in a very stimulative position.

"Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going.

"Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for the some time.

"Financial markets currently expect the Reserve Bank to begin raising the official cash rate around the middle of the year and continue to do this in small steps for some time. This is broadly in line with our current views as outlined at last week's OCR Review."

However, he says the timing and pace of returning the OCR to more normal levels will ultimately depend on economic developments.

"Both markets and ourselves foresee that the official cash rate will not need to rise as far in this cycle as it did in the last one.

"But a final caution: recovery so far has been full of surprises. There will be more to come."

"Overall, we are emerging from the crisis with some reconstruction of our external deficit, as a result of strong exports, weaker import growth, suppressed domestic profits, and some consolidation of balance sheets."

On the other hand, he says the domestic sector is seeing a more fragile recovery, with business bruised but not permanently scarred.

"It is behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff."

Dr Bollard says banking sector credit data continues to be extraordinarily restrained and whatever the explanation, the Reserve Bank certainly wishes to see credit available for all sound business ventures.

In the household sector, there has been only a soft pick-up in house prices, new building and sales as householders are building up savings and reducing debt.

Comments from our readers

On 7 May 2010 at 9:09 am Anukool said:

Looking at the crisis takign place in Greece and the impact it is having on the US Market, and the potential fall from grace of Portugal that might follow, I wonder how true this 'recovery' people keep talking about really is. If the Mortgage rates go up since the global economy is on its way up, maybe we still ahve a few bumps on the way there and the rates might go up very slowly indeed.. I would be keen to get others input on this matter... I jsut bought a house and have kep it all on floating due to the low rates, and am hesistant to fix it when I dont see a stable world economy, that might raise the rates considerably.. What do you reckon?

On 7 May 2010 at 11:40 am Insider said:

with all that is going on in the world economy at the moment it puzzles me that AB is even considering taking his foot off the brake pedal. We need at least 12-18mths for the average Kiwi to bring about some balance and confidence again, this would then create a better platform. Hold tight Kiwi's and remember it was greed and bad management that put the economy's in a tail spin. Oh Anukool, floating with a non-bank lender is a good option, there are some interesting debt reduction opportunities available through them.

On 7 May 2010 at 12:23 pm AndyHoller said:

It is extraordinary to talk about economy recovery with rising mortgage rates looming in the horizon, when we all know that these rising costs will eventually all been rolled over to the actual consumer. For more than almost 18 month we have now a OCR of 2.5% and the banking industry have been well above 5.75% and more in their demands. Even with their costs their profits are enormous. I do wonder who is recovering: the banking industry or the actual economy on the street??!!

Bollard: taking the foot off the accelerator

New Zealand's recovery from the Global Financial Crisis is entering a new, less fragile stage, which will allow monetary policy stimulus to be removed, Reserve Bank Governor Alan Bollard said today.

Thursday, May 6th 2010, 3:24PM 3 Comments

Comments from our readers

Commenting is closed

www.GoodReturns.co.nz