Kiwis must save - Bollard

BY DAVID HARGREAVES
Last updated 10:03 14/07/2009

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Reserve Bank Governor Alan Bollard is urging New Zealanders to save more and reduce debt in order to help our economy recover.

In a speech to a Hawke's Bay business audience today Bollard said New Zealand's economy was likely to "start recovery ahead of the pack" from the global upheavals of the past year.

But a "clear risk" over the medium term was that Kiwi households resume their "borrow and spend" habit before they have paid down some of their existing debt. "This could be triggered by renewed moderate house price inflation, and needs to be avoided," he said.

New Zealand is seen internationally as having a poor record in savings with a result that a lot of personal investment is undertaken with borrowed money. This means extensive borrowing offshore, which has resulted in the country running up big current account deficits - the difference between what the country earns overseas from its exports and investments and what it pays for its imports and the investments foreigners have in New Zealand. The high levels of these current account deficits are of concern internationally.

Bollard said that with slower growth in household income now expected, households will have to reduce spending growth in order to reduce debt. "Reliance on past experience of strong house price inflation and easy credit will be untenable."

While there were now signs of a global recovery, and a Great Depression had been avoided, world growth was likely to remain subdued for the next year or two, Bollard said. The current low international interest rates, expansion of liquidity and central bank balance sheets and the fiscal stimuli would be necessary for some time.

This was now an opportunity for New Zealand to rebalance.

"Getting the sort of sustainable recovery we want will be assisted by: first, greater savings by the household sector, to reduce the need for foreign funding of the economy; second, investment in the economy's productive base, particularly in the tradable sector; and third, greater durability and depth in funding markets, including a lengthened maturity structure for bank funding," Bollard said.

A priority over the coming year or so would be for New Zealand banks to diversify their funding sources more and to increase the proportion of stable funding sources, including long-term wholesale borrowing and retail deposits.

Bollard said that increased household saving would have the added advantage of providing a more stable source of funds for business investment and expansion, reducing reliance on foreign funding. This would contribute to more stable and lower interest rates, thus promoting a more sustainable growth path.

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- BusinessDay

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