Bollard says attitude to debt changing

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

The experience of recent years will change the way New Zealand households think about debt, Reserve Bank Governor Alan Bollard says.

"For decades, it has seemed attractive for households to borrow - first as a hedge against a couple of decades of high inflation, and more recently as real house prices rose more dramatically than at any time in our history," he said in a speech to the the Employers and Manufacturers Association in Auckland yesterday.

"High inflation is a thing of the past. And a repeat of the house price boom not only seems unlikely but would be very damaging and risky if it were to occur."

But it is sobering that debt-to-income ratios have still been edging up across the economy as a whole, even as it contends with the legacy of debt from the last decade's boom, he said.

Private sector credit, which was equivalent to about 70 per cent of gross domestic product in 1990, peaked at 160 per cent of GDP in 2009.

"In many countries, including New Zealand, private (business and household) debt-to-income ratios have fallen back a little - and that is typically what people have in mind when they talk about deleveraging," Bollard said.

Bollard acknowledged the Reserve Bank has been surprised by the tepid nature of the economic recovery and puzzled at why there was not more excess capacity in the economy, given how weak GDP has been.

"Like most other central banks we have been surprised at the way policy rates [like the OCR] have needed to, and been able to, remain so low for so long," he said.