Bollard warns of currency, housing risks

Reserve Bank governor Alan Bollard. Photo / Mark Mitchell.

Reserve Bank Governor Alan Bollard is warning of the risks of a high New Zealand dollar and rising house prices but has also downplayed the risks after leaving interest rates unchanged today.

Bollard kept the official cash rate (OCR) unchanged at its record low 2.5 per cent, where it has been since late April, and repeated his message that the Reserve Bank expected the rate to remain at or below that level "until the latter part of 2010".

ASB economists Nick Tuffley and Jane Turner said the Reserve Bank had resigned itself to the role of spectator, accepting the current levels of the NZ dollar and interest rates. It had mostly given up trying to "jawbone" those down, they said.

The Reserve Bank had also acknowledged the initial stages of recovery would be household led, revising up consumption growth and scaling back the export-led recovery, the ASB economists said.

By declining to cut the OCR today, the Reserve Bank had signalled it was extremely unlikely to ever cut further.

Bollard cited evidence that a "patchy" recovery was under way, but warned that the medium term growth outlook remained weak.

"Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar; this limits the scope for employment and investment to rebound quickly."

If the exchange rate was to continue its recent appreciation, or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery would be brought into question, Bollard said.

In the Monetary Policy Statement today, the Reserve Bank said house prices had risen 4.4 per cent in the past four months, apparently driven by an unusually low number of dwellings being offered for sale.

It expected the tight supply in the housing market to persist in the short term, supporting an increase in house prices for the rest of 2009.

Overall, it expected house prices to hold up around current levels for the rest of its forecast period, to early 2012.

Information from the Reserve Bank shows house prices have fallen 10 or 11 per cent from peak to trough, while three months ago it had been picking a fall of about 16 per cent.

Answering questions today, Bollard said the Reserve Bank did not want to see a household sector reinvigorated with confidence ploughing back into housing in a major sort of way.

He also said the Reserve Bank did not expect that would happen.

"I think New Zealanders have been through this period and have realised that house prices don't keep going up forever.

"We are looking at a fragile housing recovery off a trough, but we wouldn't want to overstate it. It's a story about only very limited increases in prices."

Similarly, despite his concerns about the strength of the currency, Bollard also said he did not want to be "too hand wringing about the question of the NZ dollar".

"Actually, recently it has been tracking up our commodity price story in a way that's not necessarily that far from fundamentals."

Bollard said it would be disappointing if the NZ dollar's trend continued, because it would cut into export returns and put at risk the recovery being seen in the current account deficit.

But he also said that while the Reserve Bank was having to contend with a higher than expected level of the NZ dollar against the US dollar, the export picture now was also slightly stronger than had been expected. Both export volumes and export prices had been a bit stronger.

He was also pleased to see evidence of the dairy price "bottoming out and showing some growth", he said.

The price for whole milkpowder jumped a total of 50 per cent at Fonterra's two latest monthly auctions.

"We believe that's enough evidence to say that the longer term price looks healthier. That does have quite a significant effect and actually helps balance out that higher NZ/US dollar cross rate," said Bollard.

- NZPA