Don't hibernate says Boillard

http://www.interest.co.nz Reserve Bank of New Zealand Governor Alan Bollard made the unusual call this morning for banks and businesses not to hibernate in the face of tighter credit markets and talk of an economic slowdown. He said he would be disappointed if businesses held back on quality investment because of these credit constraints, adding many people seemed to have forgotten what a slower economy looked like. Bollard said the New Zealand economy remained fundamentally sound and credit worthy. "Banks, businesses and households alike need to recognise the new external environment and adopt a cautious approach -- but don't go into hibernation, the underlying economy remains robust," Bollard told the Marlborough Chamber of Commerce on Wednesday morning. New Zealand had experienced a record period of uninterrupted growth that had left the economy stretched, Bollard said. Dairy prices had been strong and government's fiscal policy was more expansionary this year, adding to inflationary pressures from fuel and food prices, he said. Wage pressures remained high, and in 2009 and 2010 there would be a significant boost to inflation from the emissions trading scheme. "For these reasons monetary policy in New Zealand has been relatively tight for some time, with a current Official Cash Rate of 8.25 percent. This leaves us in a better position than some Northern Hemisphere countries that may still have to confront future inflationary pressures," Bollard said. The Reserve Bank expected the New Zealand economy to see a markedly weaker growth profile this year because the housing market was now softening as it needed to, the continued high New Zealand dollar was constraining export receipts, and dry weather this summer had hit dairy and meat volumes. The market disruption around the credit crunch was having only a limited effect on New Zealand's trading partners, apart from the United States. "This does not look like unusually weak world growth, and indeed the continued strength of Australia and Asia is an important continued growth driver for New Zealand. We will continue to monitor these economies and commodity prices closely." However, Bollard said the disruption in financial markets had seen funding costs rise and credit conditions tighten in New Zealand and Australia. New Zealanders were seeing the effects of this via effective mortgage rate rises and reduced corporate credit availability. It would be disappointing if New Zealand businesses slowed quality investment because of credit constraints, Bollard said. But while there has been a lot of pessimistic commentary in the media, the Bank saw it as a cyclical adjustment. "Because we have been so strong for so long, some people have forgotten what a slower economy means."