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Orr urges business, govt to take advantage of cheap finance

(Headline abbreviated, original headline: RBNZ's Orr urges business, govt to take advantage of cheap finance)

By Rebecca Howard

Aug. 28 (BusinessDesk) - Reserve Bank governor Adrian Orr wants businesses and government to take advantage of low interest rates and invest in long-term projects, but says savers may need to re-think relying on low-risk term deposits.

"Businesses and governments should be re-assessing their hurdle rates on their investment projects. Low and stable global interest rates mean that what was once costly may now be a sound investment for the future," he said in a comment published on the Reserve Bank's web site after attending the annual central bankers’ gathering at Jackson Hole in Wyoming.

He reiterated that monetary policy remains as effective as ever and "for small open economies like New Zealand, the exchange rate plays a significant additional role in competitiveness." The kiwi recently traded at 63.60 US cents, down around 5 percent since the beginning of the year.

"Our research gives us confidence that even at these low levels of interest rates, monetary policy remains as effective as ever at providing timely economic stimulus," he said.

The interest rate lever, however, is "blunt" and it is "not personalised."

"Savers - investors - and consumers are treated equally, and are often the same person doing various activities. We make our interest rate decision to best bring about prosperity and wellbeing of all New Zealanders in the long-term," said Orr.

"There are different outcomes for different people. Homeowners may feel wealthier, those outside of this asset market would be facing a higher price to buy but at more affordable servicing costs. Savers in low-risk deposits will need to invest more actively - and so on," he said.

RBNZ data show New Zealand households held $180.9 billion in deposits at March 31, of which $177.98 billion was with banks.

New Zealand's central bank cut the official cash rate by 50 basis points earlier this month to a record low 1 percent due to an expected decline in trading partner growth, lower New Zealand inflation expectations, and a global swing to lower interest rates, said Orr. The rate cut also "reflected the ongoing funk global and domestic business confidence is in."

He said, however, central banks cannot operate alone.

Monetary policy "has its limitations and needs to be partnered with broader fiscal and structural economic policy - the domain of the government of the day," he said.

Likewise, business people need to consider a much longer-term horizon when investing.

Orr said the central bank understands that lower interest rates do not remove global political uncertainty "but they do offer greater certainty on the financial and investment front."

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