Bollard chooses to be a spectator

Alan Bollard has rightly warned about the economy's imbalances threatening any recovery in the long term, but he has done nothing about it. New Zealand's property obsessed populace are making the same mistakes all over again, aided and abetted by banks scared of lending to business.

New Zealand's banks lent over NZ$6 billion to farmers and homebuyers in the first eight months of 2009, yet reduced lending to businesses by NZ$3 billion. New Zealand's current account deficit is still rising and the nation is still sucking in foreign debt to pump up property prices. Sound familiar? This nation has learnt nothing despite all the tellings off by our headmasters at the Reserve Bank, Treasury and the ratings agencies.

Yet Bollard still appears to be doing nothing. He could fire a shot across the bows of the housing market by warning of rate rises to come sooner rather than later. He could have stopped it in its tracks by putting up interest rates. Instead he is holding the Official Cash Rate at a record low of 2.5 per cent and promising to keep it there for another 12 months. He is adding fuel to the fire.

Critics would argue any hike in the OCR would simply push the New Zealand dollar higher and make the imbalances worse. I doubt that. The currency markets are utterly focused on US dollar weakness and the overall global outlook. They have already priced in tighter Australian monetary policy and we're just along for the ride. Markets already believe Bollard will have to hike the OCR by early next year, not the latter part of 2010 that he has pledged.

Bollard could also suggest a tightening of rules about capital adequacy for banks to discourage them from lending so heavily to farmers and home buyers, but he has given no indication he will do that.

Bollard appears to be comfortable as a spectator to a slow motion action replay of an economic car crash that he has seen before.

Why won't he do something about it?

It is clear since the June Monetary Policy Statement that the housing market is firing up again. Auctions are full and clearance rates are down. Open homes are chocka-block with eager buyers brandishing their mortgage approvals at 5.5 per cent interest rates. It's amazing what you think you can afford when you believe interest rates will stay low for the foreseeable future (which for most people is about 2 years).

Inaction by the Reserve Bank simply invites the inevitable sovereign credit rating downgrades and a loss of international investor confidence that will provoke a much harder landing in years to come.

Is that our only hope?

Perhaps Bollard should simply ask for the ratings agency to hit the fast forward button and downgrade us sooner rather than later. That seems to be the only way this version of economic 'deja-vu' will end.

Bollard seems intent on doing nothing himself.

 

Bernard Hickey

 

 

Pictured: Reserve Bank governor Alan Bollard. Photo / Mark Mitchell.