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NZ needs to be ready for recovery

New Zealand will be better prepared for economic recovery if households, firms and banks do not "pull down the shutters", Reserve Bank Governor Alan Bollard said today.

Dr Bollard told the Canterbury Employers' Chamber of Commerce the economy is in the middle of a major international shock that is developing from financial turbulence into economic recession.

"Households, firms and banks will naturally be very cautious during this process. However, we should also be watchful for the opportunities, and mindful of the risks of defeatism. Within the Western world, New Zealand's economy and financial system are relatively well-placed to weather the adjustment."

Dr Bollard said that past recoveries have occurred suddenly and strongly, and New Zealand needs to remain well-positioned for such a recovery. "This has been New Zealand's experience in the past. Households and firms should not pull down the shutters, and banks should continue to lend on sound business propositions."

Dr Bollard said large underlying structural adjustments are underway internationally. The process of readjustment could be very rocky for exposed players, with real economic costs. The debt build-up will take years to prune back to sustainable and prudent levels.

"We have not escaped the impact of the massive international credit crunch. In our case, the tightening has exposed vulnerabilities associated with household and external indebtedness, and how this debt is funded. The global recession is also now affecting us through trade channels and a slump in world commodity prices."

New Zealand's policy responses have probably been about as successful as might be expected, he said.

"We have eased monetary policy substantially and very rapidly. Inflation remains under control, following the largest international commodity and asset price surge for decades. We greatly expanded our liquidity facilities. Cash continues to circulate, despite enormous pressure to hoard it.

"Our banking system remains well-capitalised and has avoided the problematic credit exposures that have brought some major overseas financial institutions to their knees."

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