By Alex Tarrant
Finance Minister Bill English says he is frustrated with market talk about the level of the New Zealand dollar, having been told by credit rating agencies the currency is overvalued, while others in financial markets say it is increasingly looking like a safe haven investment.
English also said he thought deflation posed a bigger risk globally than inflation over coming years.
Speaking to the Federated Farmers' AGM in Auckland on Thursday, English said Reserve Bank legislation was unlikely to affect the level of the New Zealand dollar as currency markets were being influenced by larger economies like the US.
He said the Reserve Bank's targets were unlikely to change when new Governor Graeme Wheeler was appointed in September, other than possibly including more reference to controlling rapid credit growth, something Reserve Bank Assistant Governor John McDermott last week said the Bank was looking at.
However, rapid credit growth was the story of the last decade, he said. The focus had now shifted to making the New Zealand economy more competitive and productive as a way of dealing with a persistently high New Zealand dollar. English praised exporters for their "impressive" ability to deal with the high currency over the last few years.
He reiterated the Government wished to return its books to surplus in the 2014/15 year.
Frustrated by NZ$ talk
“I can be, one day, meeting with credit rating agencies who say to me, 'New Zealand has these very high levels of debt to foreigners, that’s a big vulnerability, you’re in danger of a sudden stop where the market just stops lending to you, and therefore your credit risk is higher than we would like to see it'," English said.
“Then on the other hand, the next day you’re talking to someone in the investment markets who’s saying, 'New Zealand looks like a bit of a safe haven, who knows what could happen with these other currencies'," he said.
“If you listen to the credit rating agencies, the currency should be going down to the level that fixes these long-run imbalances - the big current account deficit, or a larger-than-ideal current account deficit. And if you listen to the markets, they’re saying, 'you’re looking a safer bet month by month.' Well, one of them is wrong, because they’re giving me opposite stories.
“I think that just shows the kind of confusion you’ve got in global markets, not just about us, but about other currencies like the yen, which has been consistently strong even though Japan has got the worst public debt in the developed world by quite a long way," English said.
“So I don’t know what to make of it.”
English said he did not think different Reserve Bank legislation would have any effect on the currency.
"We just appointed a new Reserve Bank Governor. There’s unlikely to be much change in the [policy targets agreement] framework or the Reserve Bank, other than that they are spending time trying to understand how to control fast credit growth," English said.
“But even then that’s a bit of the last war. Credit growth in 2007 was something like 16% growth in borrowing in New Zealand. Well at the moment it’s zero or one percent – it’s creeping up. So we don’t see much change in it," he said.
“Our problems over the next couple of years, at least globally, are going to be more likely deflation than inflation. Deflation’s probably more to be feared than inflation."