RBNZ's Bollard says comfortable with interest rate level at the moment, watching and waiting for housing sector recovery

By Alex Tarrant

Reserve Bank Governor Alan Bollard says he is comfortable with where New Zealand interest rates are sitting currently, although the RBNZ would have to push them up as the housing sector recovers, but has time to wait on that front.

Bollard also warned that if European growth "really slowed" as it looked like doing, then that would hit growth in East Asian economies which, as found in 2008, were not really de-coupled from global financial events, which would hurt commodity prices and therefore New Zealand growth.

Prime Minister John Key and Finance Minister Bill English have said in the last week that New Zealand was in a good position to handle any fallout from the European sovereign debt crisis, given its connections to Australia, China and the rest of East Asia, as long as Asian economies stayed de-coupled from the economic turmoil in Europe and the United States.

Bollard said Asian economies had stayed de-coupled from the turmoil so far, but lessons from the post-Lehman crisis in late 2008 showed their exports fell away hugely, indicating "no one is really de-coupled".

"At that stage their growth, their exports fell away hugely. We wouldn’t want to see that happen again. If it did it would hurt commodity prices, it would hurt Australian growth, and it would hurt New Zealand growth,” Bollard said on National Radio on Thursday.

Speaking on National Radio's Nine to Noon programme after returning from meeting other central bankers in Washington, Bollard also said New Zealand bank funding costs could be affected by the European debt crisis, although if a nation like Greece defaulted on its obligations, the fallout should be closer to what happened following the Northern Rock failure in 2007, where markets were still willing to lend to NZ banks, rather than what happened after the collapse of Lehman Brothers in 2008, when bank funding lines dried up.

The Reserve Bank was well positioned to handle any funding crisis, having developed the tools to do so following the Lehman crisis, Bollard said.

Asked about his views on interest rates, Bollard replied the RBNZ was "comfortable with where things are at the minute".

"We think we're going to need to have to push them up as we get more housing sector recovery, but we've got time to wait and watch on that," Bollard said.

New Zealand was in a reasonably comfortable space on that front, which was different from a number of Northern Hemisphere countries, he said.

'Thoroughly depressing'

There was a "thoroughly depressive atmosphere" around Washington among European and American policy makers and analysts, Bollard said..

“I think there were two different sorts of depression: One was American depressive talk, and they don’t usually talk that way, and the other was European – some of that’s very complicated," he said.

Financial markets were very volatile right through this period, as the Reserve Bank was trying to track what risks there were for New Zealand from it all.

One risk was that a slowdown in European growth would hit China and other East Asian countries which export to Europe, which would in turn harm New Zealand's growth.

“[Another] relates to, could we see the Europeans make such a mess of trying to sort out their financial contagion that the markets remain very, very fragile, and remain reluctant to offer medium-term funding for even good countries and good banks like Australia and New Zealand’s?" Bollard said.

“At the minute it’s very hard for Australasian banks to get medium-term funding in these European markets. I don’t think that’s a problem at the minute because they’re very well funded. But were that to continue through next year, it would become a problem at some stage. That would certainly slow down lending, which would slow down growth in New Zealand,” he said.

October important

Bollard said October would be an important month for both Europe and the US to present detailed plans of how they would handle their respective problems. There was a risk New Zealand's funding lines could be squeezed if European policy makers did not convince markets it was on top of the situation. Markets would be watching the likely Greek default to see how it was managed, with an eye on Italy and Spain, which were much more central to the Eurozone's debt problems due to French and German bank exposure to them.

But rather like a squeeze similar to the one post-Lehman in 2008, Bollard said he expected any funding problems would be similar to those experienced after the failure of UK bank Northern Rock in 2007, at the same time as sub-prime problems in the US were appearing on the agenda.

“The markets were looking at Australasian banks and saying, you don’t have any sub-prime do you, and the answer was no, good banks, and they said, fine, we’ll keep lending. But of course a year later, after Lehmans, that all changed," Bollard said.

“They said, ‘are you a bank? Do you need money? If you do, we’re not lending’. We don’t want to see that happen again. I don’t think it will, but there is more of a risk out there now,” he said.

China still growing

A good side to the story from New Zealand's point of view was China looked like it had survived a soft landing and was still growing, along with other East Asian and developing market countries.

“There are risks in those, but we still think that holds together, and that keeps Australia going, and that keeps commodity prices high, and that’s good for us. So actually this is a very good place of the world to be,” Bollard said.

“But nothing’s guaranteed in all of that, it means we’ve just got to be careful as we go forward," he said.

Commodity prices had already come off a bit, but so had the New Zealand dollar, which Bollard still considered over-valued at just over 77 USc.

(Updates with 'thoroughly depressing' section, comments on Asia not being de-coupled.)