Kiwi sta­ble on na­tion’s growth out­look, says cen­tral bank chief

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New Zealand’s dol­lar may stay strong and there isn’t much that can be done be­cause in­vestors are at­tracted to grow­ing economies, ac­cord­ing to the na­tion’s cen­tral bank.

“It’s hard at this point to see any fac­tor that would lead to a ma­jor de­pre­ci­a­tion in the ex­change rate in the short term,” Re­serve Bank of New Zealand Gover­nor Graeme Wheeler told par­lia­ment’s fi­nance se­lect com­mit­tee. He re­it­er­ated that cut­ting in­ter­est rates is un­likely to sus­tain­ably lower the lo­cal dol­lar.

The so-called kiwi has gained about 6 per­cent this year, the best-per­form­ing Group of 10 cur­rency, as global in­ter­est rates fell and in­vestors look to economies with sound poli­cies, im­prov­ing eco­nomic growth and may ben­e­fit from higher com­mod­ity prices. The coun­try’s econ­omy ex­panded 2.6 per­cent in the year ended June 30 and growth is fore­cast to ac­cel­er­ate, ac­cord­ing to cen­tral bank fore­casts pub­lished in Septem­ber.

“A pe­riod of fur­ther strength re­mains pos­si­ble” for the lo­cal dol­lar, the RBNZ said in its half- yearly Fi­nan­cial Sta­bil­ity Re­port re­leased ear­lier. “This would par­tic­u­larly be the case if New Zealand’s rel­a­tive growth out­look con­tin­ued to be per­ceived as fa­vor­able de­spite the lower terms of trade.” Wheeler, the for­mer World Bank co- manag­ing di­rec­tor who took over from Alan Bol­lard in late Septem­ber, kept the of­fi­cial cash rate at a record-low 2.5 per­cent in his first de­ci­sion on in­ter­est rates Oct. 25, not­ing the high ex­change rate was un­der­min­ing ex­port earn­ings. To­day’s re­port didn’t con­tain com­men­tary on in­ter­est rates.

“There’s no easy so­lu­tion that says cut in­ter­est rates 25 pips and the ex­change rate will go down,” Wheeler told the com­mit­tee. He said quan­ti­ta­tive eas­ing, or cen­tral bank as­set pur­chases aimed at bol­ster­ing liq­uid­ity, were “largely a sign of des­per­a­tion” when pol­icy mak­ers had nowhere fur­ther to go on in­ter­est rates.

“If the is­sue is, should we move to quan­ti­ta­tive eas­ing in New Zealand, we don’t think that’s some­thing that de­serves se­ri­ous thought at this point,” he said. “We have plenty of scope to cut in­ter­est rates if we need to.”

The na­tion’s econ­omy “has con­tin­ued to grow mod- es­tly” and pri­vate-sec­tor credit has be­gun to rise again af­ter be­ing flat in re­cent years, the cen­tral bank said to­day.

“Some in­crease in credit will be nec­es­sary to sus­tain eco­nomic growth, but ex­ces­sive credit growth could hin­der re­bal­anc­ing of the econ­omy and ac­cen­tu­ate ex­ist­ing vul­ner­a­bil­i­ties,” Wheeler said in the re­port. The cen­tral bank sig­naled it is mon­i­tor­ing house­hold credit growth as the hous­ing mar­ket strength­ens.

“If credit de­mand was to strengthen sig­nif­i­cantly, and banks were will­ing and able to ac­com­mo­date that de­mand, in­debt­ed­ness could re­sume and up­ward trend erod­ing house­holds’ re­silience to shocks,” it said.

House prices rose 5.3 per­cent in the year ended Sept. 30, the fastest an­nual gain since May 2010, ac­cord­ing to Quotable Value New Zealand. Prices are over­val­ued rel­a­tive to in­comes and rents and a sub­stan­tial price slump could re­sult in strains on house­hold and bank bal­ance sheets, the RBNZ said.

Credit growth is also ac­cel­er­at­ing in the farm­ing in­dus­try led by dairy­ing.

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