January 25^th 2008 – Bollard makes appeal to soften shocks

The Reserve Bank Governor has appealed to consumers, farmers, and the government to help reduce the economic shocks that are driving up inflation and interest rates. Dr Alan Bollard says the New Zealand economy is in pretty good shape, but until there is a slow down in spending interest rates are unlikely to fall.

In his first major speech of the year Bollard said although New Zealand had weathered some significant global shocks over the past few years, it faces ongoing challenges. Bollard is fighting an ongoing battle against inflation which is currently running above the 3% upper limit that the bank looks after, and the Reserve Bank has set some of the highest interest rates in the western world at 8.25%.

This in turn has caused a shock for the New Zealand dollar, which on Friday morning was trading above 77 US cents.

Canterbury employers are worried about the persistently high exchange rate, not to mention skill shortages and rising costs. "We've got a problem with costs. We've got energy costs, we've got general compliance costs, we've got raw material costs, and we have labour costs," says Canterbury Chamber of Commerce spokesperson Peter Townsend.

The Reserve Bank blames consumer spending for pushing inflation above its 3% upper limit. The recent dairy boom has made matters worse, and the bank says interest rates won’t come down until the spending spree comes to an end. "Any more consumer based spending, any helicopters that farmers buy for herding cows, things like that, are going to influence our monetary policy," he says.

What's more, the economy will soon face the added cost of the government's new carbon emissions trading scheme which could boost inflation by 0.5%. Bollard says this may add significantly to energy prices, particularly petrol and electricity prices.

However, most business people appear to accept that official interest rates need to remain above 8% for a while yet. "I think it probably needs to happen for a while longer to take a bit of the heat out of the housing market to be honest," says a businessman.

The Reserve Bank says the growth in the market is cooling off, but what it cannot predict right now is whether there will be a global economic downturn that will end one of the longest economic booms in New Zealand history. Many of these challenges and associated price pressures are associated with the growing international presence of China and other emerging market economies.

The financial market instability emanating from the sub-prime US mortgage market represents the most recent emerging threat to economic growth. Since the December Monetary Policy Statement there has been ongoing turbulence in international financial markets and deterioration in the outlook for the United States and European economies.

If you are interested in migrating to New Zealand during this booming economic period then contact  info@amblercollins.com for further information and assistance.