Alan Bollard has hit back at doomsayers

http://www.interest.co.nz Reserve Bank of New Zealand governor Alan Bollard has hit back at doomsayers who are baying for an early cut in interest rates, arguing the economy remains solid and inflation remains a problem, meaning interest rates are on hold for now. "Understandably much of the media commentary has been pessimistic, focusing on the prospects of a sharp world slowdown and financial market upheaval. Monetary policy must take these risks seriously, but balance them against the inflation outlook," Bollard said in a speech on "New Zealand and the World Economy" at a conference in Sydney on Friday. "Inflation pressures in New Zealand remain relatively strong. Higher food and commodity prices are adding to inflation in New Zealand as they have in other countries, including Australia and China, which have continued tightening monetary policy in recent months. Over the next few years, the introduction of an Emissions Trading Scheme in New Zealand will also add to headline inflation," Bollard said. "Monetary policy in New Zealand has been relatively tight for some time, and we think the current setting of 8.25 percent with a flat outlook remains appropriate, he said. Several commentators and business leaders have called for an early interest rate cut in recent weeks, including NZX Chief Executive Mark Weldon and Real Estate Institute President Murray Cleland. The Bank of New Zealand has forecast a recession later this year and expects the Reserve Bank to cut interest rates sooner rather than later. Bollard said the RBNZ was projecting a moderate slowdown in economic activity over the next few years, reflecting weaker household spending, business investment, the negative effects of dry weather conditions, and the impact of the exchange rate on exporters. "As we noted in our recent Monetary Policy Statement, there is a risk that the slowdown in the US economy and international financial market turbulence results in a sharper downturn than we are projecting. Much rests on the extent to which the economies of the Asia-Pacific countries, which are important trading partners for New Zealand, can remain largely de-coupled from these developments," he said. "However, despite some negative headwinds, a number of factors are likely to help sustain activity in the New Zealand economy. A strong terms of trade is expected to support export revenues while higher government spending and the prospect of personal tax cuts may limit the extent to which the domestic economy cools. "As we discussed in our last Financial Stability Report, released in November, New Zealand banks have virtually no direct exposure to the US sub-prime market, and have engaged in very little securitisation," he said. "However, as is the case in Australia, conditions in global markets have seen funding costs rise and credit conditions tighten. "Over the past three weeks global financial markets have remained volatile, funding costs had risen and credit conditions tightened. New Zealand households and businesses are seeing the effects of this via higher interest rates," he said. "However, we will need to keep a close eye on global economic and financial developments for any indications that global activity is slowing by more than most forecasters are currently projecting."Bollard said the Bank would closely watch a number of factors including: Northern Hemisphere financial market turbulence; conditions in the Australasian financial sector; the extent to which East Asia growth is coupled to US and European growth, and commodity price developments; and the way in which the adjustment in the housing market and domestic spending proceeds."