Wheeler manages to move dollar in farewell speech, sees prospects for 'robust economic growth'
By Jonathan Underhill
Aug. 30 (BusinessDesk) - Reserve Bank governor Graeme Wheeler said "the prospects look promising" for continued robust economic growth in New Zealand over the next two years and the greatest risks are from "inflated global asset prices and the continuing build up in global debt".
Wheeler made the comments in what is his last scheduled speech as governor. He told the Northern Club in Auckland that if growth in the global economy slows, "we have some scope to buffer our economy."
"We’ve greater room for monetary policy maneuver than central banks in many advanced economies," he said in speech notes. "Our official cash rate is 1.75 percent – above the zero and negative interest rates of several advanced country central banks – and the bank has not grossed up its balance sheet by buying domestic assets. With a budget surplus and low net debt relative to GDP, there’s also flexibility on the fiscal policy side."
Wheeler said a lower New Zealand dollar "is needed to increase tradables inflation and help deliver more balanced growth".
"To a large extent the high exchange rate reflects the favourable performance of the economy, the high terms of trade, and weakness in the US dollar," he said. "The appreciation in the exchange rate has been a headwind for the tradables sector and, by reducing already weak tradables inflation, made it more difficult to reach the bank’s inflation goals".
The New Zealand dollar dropped to 72.53 US cents after the speech was released from 72.62 cents immediately before. It dropped as low as 90.71 Australian cents, a five-month low, from 91.19 cents. The trade-weighted index fell to 75.86 from 76.
Wheeler won't serve a second five-year term when his present appointment expires on Sept. 26, three days after the general election and two days before the next monetary policy statement. His deputy, Grant Spencer, will act as temporary governor while a permanent replacement is found, at which time he too will retire.
Wheeler thanked the Reserve Bank's board "for their intensive scrutiny, support, and advice" during his tenure and said the bank's "strong international reputation is due to the high calibre, dedication and commitment of colleagues throughout the institution."
“Over the past five years, the bank’s monetary policy has been an important driver behind the rate of output and employment growth, and the path of non-tradable inflation and inflation expectations," he said. "Long-term inflation expectations remain well anchored at the target mid-point of 2 percent.”
He said loan-to-value restrictions on mortgage lending "have reduced financial stability risks as house prices became increasingly stretched" but LVRs aren't expected to be a permanent measure.
"However, debt-to-income ratios have risen in recent years, and with the underlying drivers of housing demand (population growth, low interest rates) remaining strong and demand outstripping supply, there’s a risk of a housing market resurgence (and a sharp lift in high LVR lending) if LVRs were removed at this time,” he said. "We were conscious that the introduction of LVR restrictions would make life difficult for the Bank, given the sensitivities around housing."
Wheeler was appointed to the role in 2012, signing a slightly different PTA with then-Finance Minister Bill English, which put a sharper focus on reaching the 2 percent mid-point of the 1-to-3 percent annual inflation target band.