RBNZ: NZ "markedly better" than most of OECD despite setbacks; Part of reason for high NZ$; Sees housing market recovery, 'but not time to use new tools'

By Alex Tarrant

The Reserve Bank is talking up New Zealand's economic outlook relative to other developed economies, and says this is one of the factors keeping the New Zealand dollar high.

In the central bank's annual report for the year to June 30, 2012, the RBNZ said that, despite setbacks - eurozone stresses had created uncertainty in the global economy, commodity prices had declined and New Zealand's trading partner growth had slowed - there were positive economic signs ahead.

Meanwhile, the financial statements in the annual report showed the Bank made a profit of NZ$118 million in the year to June 2012, down from NZ$144 million in 2011. It paid the government a dividend of NZ$160 million, down from NZ$210 million the previous year.

The RBNZ booked a NZ$38 million loss on its foreign exchange position during the year, as foreshadowed by interest.co.nz in August. The Bank had booked profits of NZ$825 million in 2008/09 as it bought back New Zealand dollars at lower prices than it sold them for during its NZ$4 billion foreign exchange intervention in 2007 and 2008.

However since then, the rising New Zealand dollar has the Bank looking at paper losses of NZ$452 million, meaning, on paper at least, net profits so far of NZ$373 million from those interventions.

Difficult times

Outgoing Governor Alan Bollard said a slow economic recovery in the US, and particularly the simmering Eurozone crisis had cast a shadow over world growth following the global financial crisis. In New Zealand, recovery has been slower than would have been liked, with trading partners affected by Europe and bank funding enduring fragile periods.

New Zealand was coming to terms with a very different world economy, one with lower price pressures, very low or even negative interest rates, and slow growth and recurrent crises, Bollard said.

New Zealand businesses needed to find ways of operating within such an ongoing environment, while the Reserve Bank needed to ensure its monetary and financial policies were robust in such a world.

The other important area of uncertainty for New Zealand was the Canterbury earthquake rebuild.

"This will eventually provide a significant boost to nationwide activity for an extended period. However, the region has faced a number of significant challenges that have resulted in delays, including complex insurance issues," Bollard said.

"Nevertheless, we expect increases in activity in the region over the coming years: repair work has been gradually increasing over recent months, and the development of plans for reconstruction of the central city will assist with investment decisions," he said.

"These uncertainties apart, we see more positive signs ahead. Commodity prices have softened but remain reasonably strong. Our important markets in Asia have so far remained reasonably robust. We have just ended an excellent farm season. Banks have sufficient capital, funding and willingness to finance more economic activity. Interest rates are at historic lows."

The Bank's annual report noted construction activity elsewhere in the economy also remains subdued.

New Zealand households and firms continue to pay down debt, resulting in restrained expenditure on major household purchases and capital investment, it said in the report.

"Domestic GDP growth has consequently been sluggish: 2.4 percent in the year to March 2012. The recovery from the 2008–09 recession has been markedly slower than previous recoveries," the Reserve Bank said.

"While this performance may be disappointing in an absolute sense, it remains markedly better than most other OECD countries. There are signs of a recovery in housing market activity, with house sales, prices and residential consents increasing," it said.

"Climatic conditions in early 2012 were favourable for agriculture, boosting milk production and improving stock condition. Business confidence also points to continued, albeit modest, expansion. The high New Zealand dollar in part reflects this relatively favourable economic performance as international investors seek refuge from renewed recession in Europe.

"Given the current outlook for inflation, the Bank believes the level of support provided by the OCR at 2.50 percent remains appropriate and has not changed the OCR over the course of the year," the Reserve Bank said.

Not time for new tools to be used

Meanwhile, the annual report noted the Bank had outlined four macro-prudential tools for use supplementary with the Official Cash Rate that it could consider using if future credit conditions were to warrant it.

"With credit conditions in New Zealand subdued, there has been no immediate need to deploy such tools. However, the Bank continues to research the efficacy of potential macroprudential instruments," the Reserve Bank said.