Recovery underway: Bollard

Fairfax Media

GOOD NEWS: The economy is now recovering but the structure of that recovery will be important, Reserve Bank governor Alan Bollard said.

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The economy is now recovering but the structure of that recovery will be important, Reserve Bank governor Alan Bollard said.

RBNZ chief Alan Bollard said the global economy was also at a turning point and would have a fragile recovery.

"The New Zealand economy is recovering, and for us really, it's not just the size of the recovery, it's the quality we'll be concerned about," Dr Bollard told Radio New Zealand today.

He said the bank wanted to avoid a return to the debt-fuelled consumption and house buying that saw households live beyond their means prior to the financial crisis.

Asked about financial markets pricing in a start of the tightening cycle from the middle of next year, ahead of the RBNZ's projections, Dr Bollard said markets were not always right.

"The market has always got its own view and often it's wrong. We will come out with our view next week and will be as usual absolutely clear cut about that," he said.

Dr Bollard added that some other central banks would likely have to start raising rates soon as they anticipated stronger inflation pressures in the coming year or two.

Financial markets are pricing in a rate rise by mid-2010, with the one-year overnight indexed swap indicated at 2.85 percent.

There was no reaction to Dr Bollard's comments, with the New Zealand dollar steady around US68.40c.

All except one analyst in a Reuters poll of 16 economists expect the central bank to hold rates steady at 2.5 percent in its September 10 monetary policy statement .

New Zealand has been in recession since the start of 2008.

The RBNZ left rates on hold for a second month in July, but had threatened to cut them further because of the strong New Zealand dollar, which has gained more than 30 percent since March, was putting the fragile economic recovery at risk.

Dr Bollard repeated the strong kiwi was not helpful for the country's exports, but it was a reflection of the weak US currency, and many other currencies were in a similar position.

"There is a lot of concern about the US economy and about the US dollar, and that just arithmetically says everybody on the other side of the equation must be having a stronger (currency) right at the moment and we are one of them," he said.

He said despite the currency's strength New Zealand's exports had not performed too badly.

The central bank has cut rates by 575 basis points to the current record low, prompting lenders to lower their rates. It has been on hold since June, saying repeatedly since then that it will keep rates at the current level or lower until the latter part of 2010.

- Reuters