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No need for banks, businesses to hibernate, says RBNZ

Banks should avoid overreacting to the economic downturn, Reserve Bank Governor Alan Bollard told the Marlborough Chamber of Commerce today. "The New Zealand economy remains fundamentally sound and creditworthy," he said.

Dr Bollard also suggested that wage-bargaining parties should not assume that tight labour market conditions will continue as the economy slows.

"Banks, businesses and households alike need to recognise the new external environment and adopt a cautious approach – but don't go into hibernation, the underlying economy remains robust," he said.

Dr Bollard said New Zealand has experienced a record period of uninterrupted growth that has left the economy stretched. Dairy prices have been strong and government's fiscal policy is more expansionary this year, adding to inflationary pressures from fuel and food prices. Wage pressures remain high, and in 2009 and 2010 there will be a significant boost to inflation from the emissions trading scheme.

"For these reasons monetary policy in New Zealand has been relatively tight for some time, with a current Official Cash Rate of 8.25 percent. This leaves us in a better position than some Northern Hemisphere countries that may still have to confront future inflationary pressures," he said.

The Bank expects the New Zealand economy to see a markedly weaker growth profile this year because the housing market is now softening as it needs to, the continued high New Zealand dollar is constraining export receipts, and dry weather this summer has hit dairy and meat volumes.

So far, the significant financial market disruption in the Northern Hemisphere is having only a limited effect on the economies of New Zealand's trading partners, with the exception of the US.

"This does not look like unusually weak world growth, and indeed the continued strength of Australia and Asia is an important continued growth driver for New Zealand. We will continue to monitor these economies and commodity prices closely."

However, Dr Bollard said the disruption in financial markets has seen funding costs rise and credit conditions tighten in New Zealand and Australia. New Zealanders are seeing the effects of this via effective mortgage rate rises and reduced corporate credit availability. It would be disappointing if New Zealand businesses slowed quality investment because of credit constraints.

But while there has been a lot of pessimistic commentary in the media, the Bank sees it as a cyclical adjustment.

"Because we have been so strong so long, some people have forgotten what a slower economy means," he said.

Media contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021 497418, [email protected]