RBNZ's Bollard won't print money, but he's worried about an early NZ$ recovery

Reserve Bank Governor Alan Bollard has repeated his opposition to using Quantitative Easing (QE) ahead of Thursday's June quarter Monetary Policy Statement, saying he still had conventional monetary policy ammunition left and QE (money printing via bond-buybacks) was an "imperfect tool". Bollard also said in a May 22 interview with Gordon Campbell that was published on Campbell's Werewolf blog on June 8 that he was worried the currency may recover prematurely as investors get too excited about an early economic recovery. Campbell asked Bollard if the Reserve Bank should be trying to sustain a stable exchange rate over time. Here is Bollard's reply below:

What we would like to do is apply price stability in a way that it helped assure exchange rate stability - at levels that weren't at odds with fundamental drivers through the economy. I'm using my words a bit carefully here. We know we can't directly impact it. Sometimes under certain conditions things we do, do indirectly impact it "“ sometimes unfortunately. At the moment, my worry is that we could see some sort of premature recovery triggered by people thinking for example, that it's time to climb back into the financial markets that led to borrowing that led to in turn, over time led to rates going up. And led in time to the same pressure on the exchange rate. We wouldn't want that again.

Elsewhere, Bollard said he was glad the Reserve Bank had a variety of roles, including ensuring financial stability and bank safety.

A lot of banks overseas are saying : I wish we had a financial stability function. I wish we did prudential supervision. I wish we had the tools

Campbell asked Bollard if there was a risk central banks around the world may be slow to raise rates once economies recover, unleashing inflation. He replied:

Well yes, it is a risk. Partly because we don't have a certain view about how the future is going to go, when we are going to see the upturn and how strong it will be, and how persistent"¦and how much untightening it will require. I'd say the bigger risks for us are how the big Northern Hemisphere economies read that and react to that. Because while we're still doing quite orthodox stimulatory policy, they're not. They have got into unorthodox stuff and some of it will be very hard to unwind, and it will be very slow to unwind. At some stage they're going to have to say well in a year of reasonable growth, we're going to have to start tightening. That will probably still have to happen at a time when unemployment is increasing. That is going to be a tough call.

Campbell then asked what other tools the Reserve Bank could use if the economy stays in recession. Bollard replied:

We don't think that we have necessarily reached the bottom of traditional monetary policy "“ if we need to. I should say though that we're not worried about deflation in New Zealand. If you mean, prices continuing to go down on a medium term basis. We think New Zealand would be the last country in the OECD to worry about that. But if you're thinking about our economy still contracting well yeah "“ monetary policy is designed to give stimulus, and we've still got to see some of that happening. If we felt we'd got to a stage where we thought monetary policy wasn't having its normal orthodox impact, we have prepared to do other things. I'm talking about [such things as] quantitative easing. I should say I'm not expecting to have to use them as I see things at the minute. Because we see them as really imperfect tools, I'm hoping we never will.

Bollard also ruled out negative interest rates and was mildly critical of Kiwibank's role in encouraging new lending in the last 12 months.