More Turbulence in 2009? – Steering the Ship

Some parts of the Reserve Bank have been bit like peacetime army,” says its governor Alan Bollard. “We’ve heard the gunfire from offshore, there are lots of rumours flying about and all the while we’re trying to make sense of it all.
“These kinds of situations invigorate peacetime armies; but you can only run off adrenaline for so long. Eventually fatigue sets in. So we do have to be careful about stress in-house.”
To describe the past few months at New Zealand’s central bank as challenging would be huge understatement. Many parts of the Reserve Bank have been in kind of crisis mode, working closely with banks and other lending institutions to ensure the financial and monetary systems continue to function, as many traditional international credit lines virtually dry up.
Bollard and his team have busily joined other central banks in orchestrating an unprecedented series of market liquidity measures and record interest rate cuts in bid to take the sharpest edges off recession forecasters agree has long way to play out.
For his part, Bollard believes New Zealand is still in the “Oh my God” phase of the downturn, when nasty surprises are regularly landing on newswires from the powerhouse economies of the United States, Europe and Asia.
“As events have unfolded offshore, we have been the first market in the world to open each day as the news comes in,” he says. “We’re at the forefront of watching these things … there has been lot of observation analysis. The challenge has been not just observing events, but trying to get ahead of those events.
“We still need to see the New Zealand housing market trough out. When that happens, we will have some indication of where we are heading and then it will be grind as the world works through getting through the hangover following the big credit party it’s been having for the past decade.”
And, as he observes, this is good time to have “vanilla” banking system in New Zealand and Australia.
While home loan delinquencies were increasing, Bollard does not expect New Zealanders to be forced to walk away from their homes in anywhere near the same scale as being witnessed in the United States.
“But our ongoing vulnerability in New Zealand and Australia is that we don’t save enough. We fund our consumption and some investment from borrowing – that’s the bit that’s coming home to roost.
“We can take some comfort from the state of the financial sector in Australia and New Zealand. Our message to banks has been that this is not business as usual, but that they shouldn’t shut up shop.”
Asked if he had message for New Zealand businesses heading into 2009, Bollard said: “Many New Zealand companies have CFOs who have not seen recession before. But don’t shut up shop. Corporate balance sheets here are in far better shape than they were in previous downturns.”
It is another story for households, whose debt levels have risen inexorably on the back of housing boom and more than decade of uninterrupted economic growth.
“Household sector balance sheets do need to be restructured,” Bollard says.
He has been through previous economic slumps in his career. He worked in Britain during the Thatcher government’s reforms which pushed unemployment above three million. But none of the previous recessions were as destructive or as pervasive as this one.
Bollard was appointed Reserve Bank governor in September 2002. He was reappointed for second five-year term in May 2007 and, until about that time, was presiding over monetary policy through period of economic growth, buoyant housing market and increasing concerns about inflation pressures.
Before taking the helm at the Reserve Bank, he was secretary to the Treasury for four years, after roles as chairman of anti-trust and competition watchdog the Commerce Commission and director of independent economic forecaster the New Zealand Institute of Economic Research.
So, how bad might things get for New Zealand through 2009?
Bollard is careful in wording his response. He says interpreting fast-moving, volatile international financial markets and economic developments is extremely challenging – and particularly deciphering how they might play out in New Zealand, where mild recession was already unfolding before the global financial crisis hit.
It’s matter of seeing through the daily and weekly events and forming medium-
to long-term view of the world.
“The question is: If we have major financial crisis that is the worst since the Great Depression, does that have to mean we will have the biggest economic crisis since the Depression?”
In the next six months, much would depend on the performance of commodity prices – especially dairy – which, until recent downturn as the global recession took hold, had been performing strongly on the international stage.
“We see flat year [in 2009]. We will reach period when we stop getting the big bad surprises and we flatten out. At that point, we’ll be looking for policies for the pick-up.
“There is stuff happening we had talked about, but never seen before. There are going to be some great PhDs written about this period of time.”
Talking to NZ Management pre-Christmas, Bollard accepts the Reserve Bank, like all central banks, is open to criticism about its conduct of monetary policy – whether it tightened too soon or eased too fast. Often this criticism comes well after the event, when the economic outlook and inflation signals are clearer.
Economic commentator Roger Kerr of Asia Pacific Risk Management is among the critics of the central bank’s performance in recent years. He claims the Reserve Bank’s overly tight monetary stance between 2005 and 2007 inflicted considerable damage on manufacturing exporters and the productive sector and that we are now seeing the results through factory closures and job losses.
“If the global crisis had not occurred when it did, I suspect there would be considerably more scrutiny of the RBNZ’s handling of monetary policy and less acceptance of the patsy [Parliamentary select committee] report on the monetary policy framework,” Kerr said in commentary published on
“Unfortunately, the accountability and transparency of responsibility will never be sheeted home to the RBNZ as global events have overtaken the effects of this major policy error. I still contend government charges and energy prices should be excluded from the RBNZ’s inflation targets, as they cannot control these price changes through interest rate policy.”
Bollard concedes the New Zealand housing boom had put strain on monetary policy through 2005, 2006 and into 2007.
“We got on top of it, but it took us longer than we wanted and we had to go higher [with interest rates] than we wanted. What have we learnt about monetary policy? I think it’s little early to be sure about that.
“With the benefit of complete hindsight, we would have gone [reduced interest rates] little earlier. But I guess that monetary policy doesn’t fix all things and it shouldn’t be seen to be more powerful tool than it is.”
Despite increasing interest rates through 2005 and 2006, the Reserve Bank watched as the housing market got “second wind”, which prompted further rate rises. At that time, central banks around the world were becoming increasingly concerned about inflationary pressures – and then the sub-prime issue jolted the United States and fallout spread to other economies.
Bollard believes the Reserve Bank has very good view of the economy and the banking system by virtue of being “full service” central bank and having close and robust monitoring systems for banks operating in this country.
“We pretty much do it all here, so it’s easy to share information and have good view of what is not very complicated economy in New Zealand.”
This includes registration and monitoring of banks; managing the settlements and payments systems; market liquidity management; foreign reserves management; issuing notes and coins; and responsibility for running monet

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