Finance Minister English wonders what effect global central bankers' Jackson Hole pessimism will have on RBNZ Governor Bollard's growth forecasts

Finance Minister Bill English says the mood among the world's central bankers at their Jackson Hole meeting in August was “pretty pessimistic,” going by what Reserve Bank Governor Alan Bollard has told him, and wonders what effect that will have on the Reserve Bank's growth forecasts.

Bollard is set to release the central bank’s latest economic forecasts on Thursday morning when he releases the RBNZ’s September quarter Monetary Policy Statement and reviews the Official Cash Rate, which he is expected to hold at 2.5% due to global market uncertainties.

English said he would be interested to see the central bank’s growth forecasts after Bollard’s trip to Jackson Hole, and given renewed expectations Greece would default on its government debt, an event which would spook markets.

“It will be interesting to see what their view [on growth] is, because the Governor’s been over in the US with all the other reserve bank governors,” English told media in Parliament buildings after Question Time on Wednesday afternoon.

“I understand it wasn’t a happy place to be because a number of them were grappling with pretty big problems. So it will be interesting to see what the Reserve Bank’s view is as a result of [that],” English said.

“The discussion I’ve had with him indicated that the mood there was pretty pessimistic. I think we’re in better shape than that and we’ll find out tomorrow whether that’s what he thinks,” he said.

'NZers don't need to be unduly alarmed'

There was now a constant stream of news coming out of Europe indicating there was likely to be a significant event like Greece defaulting on its government debt, English said. In Question Time on Wednesday, English repeated what he said to the House of Representatives on Tuesday, that global risks were mounting, but New Zealand was in a strong position to handle the fallout from the Eurozone crisis, wobbles in Australia and a slowly-recovering US economy.

“I just want to make sure that people understand the context for New Zealand, because, actually, even a dramatic event in Europe isn’t going to affect us seriously, but it will mean the international environment’s a bit more volatile,” English said after Question Time on Wednesday.

“We want to make sure that New Zealanders don’t get unduly alarmed if some dramatic event like the default of Greece occurs,” he said.

Europe did not have the political process to sort out underlying debt problems, which led to worries.

“However hard they try, the markets are gradually closing in on Greece. There’s now about a 90% expectation that Greece will actually default. The European banks can probably handle Greece defaulting, and maybe even Portugal, it would get a bit tricky if they got to Italy,” English said.

'Fewer bidders for NZ govt debt'

One of the risks faced by New Zealand was these events were putting the spotlight on countries with significant levels of debt. In the last few years, the Reserve Bank had taken steps to ensure New Zealand banks were less vulnerable to global financial markets, while the government had taken steps to reduce its vulnerability.

But over the last month, fewer people had been bidding in New Zealand government debt auctions because of the volatility on global markets.

“Not necessarily because they think there’s anything wrong with New Zealand, but because they’re just concerned about the problems they’ve got in their home patch,” English said.

“So we’re in pretty good shape on it, but the fact that it hasn’t been an issue in the last couple of years doesn’t mean that there aren’t some risks ahead of us,” he said.

If there was to be a squeeze on New Zealand’s international funding lines, banks here were in good position to be able to fund themselves for quite some time.

“And even then, the Reserve Bank developed some tools in the 2008 crisis which mean that we could run on for quite a long time,” English said. Read English talking about the Reserve Bank's 'crisis response toolkit' in July here.

In the government’s case, there was a big bond maturity coming up in November, meaning a fair bit of the pre-funding of the government’s debt requirements would be put towards that, while there was a growing outflow from the Christchurch earthquakes as expenses mounted. Government bond issues with NZ$8.7 billion outstanding are due to mature on November 15 this year, with investors in the market (not the EQC or RBNZ) holding NZ$7.6 billion. See more here.

“So we need to be out there in the market every week raising money, and that’s what we’re doing,” English said.

New Zealand was going out to the market for a bit less than it had been over the last two years, and there was certainly fewer bids coming in for government debt. See the latest figures for government securities on issue in the chart below.

“It’s not necessarily because they think of New Zealand as a problem – we’re a strong sovereign – it’s just that these events in Europe are making the lenders risk averse. They’re all trying to buy German and US government bonds as much as they can, so it’s forcing their yields right down,” English said.

“We’re just one of a whole number of countries that are seen as a bit more risky than say Germany and the US, and so they’re a bit less likely to show up,” he said.

So will it hit the forecasts?

The Reserve Bank was due to release its growth forecasts on Thursday morning, while Treasury’s pre-election fiscal update was due in October.

“I think they’re likely to show what’s become evident – that in this calendar year the economy’s been stronger than we expected, so it will be a bit bigger, and that helps your fiscal situation. But looking out two or three years, because of these events offshore - less demand for our exports - that things won’t look quite as strong as they did,” English said.

It was ‘wait and see’ on whether this would affect the government’s 2014/15 surplus track, but the government would certainly want to avoid letting that track slide back if it could.

“Because of our high degree of private debt, and our exposure there, which credit rating agencies have talked about for a number of years, we can offset that to some extent by having the government in a certain position. So getting back to surplus is pretty important,” English said.

“There’s a bit of pressure particularly coming out of the Christchurch earthquake – in the last couple of weeks we’ve announced a couple of quite significant increases in the costs of that earthquake. If there’s more of that, that can compound and put a bit of pressure on us,” he said.

“But I think the government, along with most New Zealanders, would prefer us to get into surplus, have less debt, and be a bit less concerned about what goes on in European financial markets.”

(Updates with further comments from English, video of English talking on Wednesday afternoon about global risks).