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Q+A's Guyon Espiner Interviews Reserve Bank Governor, Dr Alan Bollard

Fuseworks Media
Fuseworks Media
Alan Bollard
Alan Bollard

Points of interest:

- Bollard dismisses government's aim of catching Australian incomes by 2025: "I don't think we can catch up with Australia"

- Bollard says New Zealand should aim to benefit from the "crumbs [that] come off the Australian table"

- New Zealand recovery from recession "still fragile"

- Reserve Banks sees "spongy" recovery and no boom in property market

- New Zealand over-investing in housing, 'owning their own homes but not their own businesses'

- Reserve Bank "not focused" on GST rise, but wants tax advantages for housing "neutralised"

- Interest rates won't rise until "later" this year

- Kiwi dollar is over-valued at US70c; should be "a bit below that number"

The interview has been transcribed below. The full length video interviews and panel discussions from this morning's Q+A can be seen on at,


GUYON Thank you Alan Bollard for coming in and joining us this morning we really appreciate that. Can I start with the global economy. Many Kiwis would have come back after summer thinking that we faced a brighter economic outlook, but there's been several dark clouds on the international horizon recently. We've got Portugal, Ireland, Greece, Spain, all in something of a financial crisis which is hammering the Euro, we've had China tighten monetary policy, and Australia, against all expectations, leaving its interest rates unchanged. Are we in now for another phase of financial crisis and recession?

DR ALAN BOLLARD - Reserve Bank Governor

No I don't think so, but it's a vulnerable sort of period, it's a fragile period of growth. Looking overseas there's some good news and some bad news. On the bad side - well we think that the worst of that news has come out of the banks now, but what's happened is a lot of those European North American economies, the governments have assumed a lot of the debt and risk, and now you're seeing what we call sovereign so country risk getting really under the hammer quite a lot and being looked at very closely by the financial markets, and that's the Greece story, Ireland, Portugal, there's a lot of worry around within the Euro system, around the peripheral countries, even Britain doesn't look as strong as it might do. Come back this side of the world it's a bit different, China of course has been growing hugely, a lot of criticism and question and uncertainty about it, but it's growing and it's done extremely well, that's pulled Australia along, and that's as a result been very strong growth - that's all good for us.

GUYON Let's turn to us. Unemployment data out last week, 7.3% unemployment, you were predicting at the Reserve Bank about 6.6% I think. Does this mean that the economy is in a lot worse shape than you had predicted?

ALAN No I don't think so, but it is fragile, I mean we've started growing, we started growing in the middle of last year, we're seeing reasonable growth figures, but you've gotta realise we've been in the worst recession world wide since the 1930s, and you don't come out of that knowing exactly how it's going to happen, you don't come out with any solidness and we're watching, as I said quite a bit of fragility around the US and Europe at the minute, and our own version of that is that we're now seeing growth, but some of it is coming from stimulus from the government, some of it's coming from very soft monetary policies, some of it's come from businesses building up stocks and things like that, and some of it is coming from very good dairy prices and some other commodity prices offshore, but domestically no it's still fragile.

GUYON Where do you think that unemployment will peak now, have we reached the top?

ALAN Well we hope so, we think so, actually the number that came out this week, you can't rely too much on those numbers short term, they jump around quite a lot, but this time it wasn't so much an increase in jobs lost, in fact there were a very small number of jobs lost, there's quite a bit increase in the number of people wanting to get back in the workforce and some of that is good news actually, so we were surprised but not all bad news.

GUYON Nonetheless I guess this will temper some of the behaviour of the Reserve Bank, I mean the indications were that you might start to raise the official cash rate as early as April. I presume now with this unemployment data, this weak labour market, that you wouldn't be moving until June at the earliest.

ALAN Well we've been boringly predictable right through this, we've said about a year ago that it was going to be some time the middle or the latter part of the year, and that's what we're still saying.

GUYON Has this had an impact Dr Bollard, the actual employment

ALAN Yeah it has, on the markets, and so the markets have said no no you're going earlier, you're going earlier, tell us which month, tell us which day preferably, but I mean you shouldn't focus on that sort of thing too much, the markets are now saying oh yes there is some sources of fragility in this economy, you do have to watch the data and take it carefully, that's what we've always been saying.

GUYON Has this pushed back the time at which you would consider raising the official cash rate?

ALAN We haven't changed our view from what we said last week which was we think we will watch the data carefully, maybe around the middle of the year, but that's a maybe.

GUYON One of the things you obviously keep a very close eye on is the housing market. We've seen house prices although they dipped, starting to edge back towards their 2007 peak. Do you expect house prices to keep rising over 2010.

ALAN Well, I mean we have to admit to some uncertainty here, this has been a big shock, people are changing their behaviours, we don't exactly know how. Initially I was a bit worried that we would see house prices go back into a boom, we're not seeing that at all, we have seen prices pick up, but actually sales are still quite low, residential investments, so building new houses is quite low, and credit growth, mortgages are very low. So no we're not seeing that at all, it's looking slightly spongy at the minute actually.

GUYON One of the factors that obviously has a big impact on housing prices is investment in the residential property sector, investors getting in there. Do you accept that the tax system advantages that and encourages people to invest disproportionately in that sector in a way that is negative for the economy?

ALAN Yes. I mean the tax system is complicated. What we're saying about it is only one of the number of things that the government has to take into account, but from the point of view of monetary policy you don't want a tax system which says you'll get an advantage from investing in one particular area, in this case housing, because then you get over investment in one sector, you get people relying a lot of eggs in one basket and that seems to be the New Zealand story, we've got quite unusual household balance sheets where people are relying heavily on houses and house capital growth for retirement and for income.

GUYON So we need to change the tax system to do something to reduce that incentive, what is the best method to do that?

ALAN Well the tax working group that came out a couple of weeks ago I thought gave a very interesting story, which they really gave a menu of changes and then a set of directions about how to approach that menu, because it's complicated, I don't want to just talk about one measure by itself, you've gotta look at how the whole thing balances up and how basically the government can keep its revenue coming in.

GUYON Well one of the things that they suggested was levying a 0.5% land tax which would reduce that incentive that we've been talking about and also raise more than two billion dollars in revenue. Do you support that idea?

ALAN That's a possibility, there are a number of things they had in mind for really neutralising that playing field between housing and other investment, and I mean ultimately it comes back to New Zealanders have been encouraged to own their own homes, but not own their own businesses, and you can see that all coming through on the balance of payments now.

GUYON So, but more broadly, and I know you don't want to drill into the detail, something needs to be done to shift investment away from the housing market and into the productive economy.

ALAN Oh well we can get by without that, but what we're looking for is a recovery where ultimately we'll have to increase interest rates, but we think that we won't have to increase them as far if you've got a flatter playing field, and that's our hope that we'll get through the next period of pick up without doing that, and therefore without putting pressure on the exchange rate as has happened in the past.

GUYON As Reserve Bank Governor inflation is your enemy, consumption an excess of consumption drive inflation, GST is a tax on consumption and something of a handbrake on spending, do you support the tax working group recommendation to raise GST to 15%?

ALAN Well GST tax is usually seen as a pretty efficient way of getting funding for the government without a lot of exemptions with reasonably low collection costs, so it's also seen as an efficient sort of tax. As far as impacting consumption investment decisions, not we're not really particularly focused on that.

GUYON But do you think it's a good and efficient way of raising the revenue?

ALAN Well we do monetary policy, we do bank regulation, don't hand out advice on tax beyond that, but we are really focused in on this tax advantage for housing and how you neutralise that.

GUYON What about personal income tax rates, cos this all affects - ultimately does affect monetary policy in terms of people's spending choices. A lot of the commentary has been at the middle and upper end I guess because 40% of families done pay any tax with the Working for Families Scheme, that's where the greatest movement or potential is, at those middle and topper ends. Do you support the idea that the top tax rates are too high and they should come down, would you support that, or would that simply lead to an increase in spending and a raise in interest rates?

ALAN Well New Zealand's unusual in that middle classes pay most of the tax here and that's quite different from some of the OECD countries, so I think we should be learning from other countries in all of this, we don't want to get too much out of line, partly because with mobility New Zealanders can just get up and leave, and that's a risk.

GUYON That is a risk and those comparisons with Australia are made in many areas of the economy. You said something interesting about potential to catch up with Australia in November 5 last year in a speech you said - we talk about catching up with Australian incomes but we have a better chance of taking advantage of their growth. Is that an admission that catching up with Australia's income and wealth is simply unrealistic for New Zealand?

ALAN Yes, I don't think we can catch up with Australia, Australia's a most unusual country, Australia has been blessed by God sprinkling minerals across the top of the surface in very easily accessible areas in places where it doesn't annoy people to mine them. China's there buying all that, it's not rocket science, they've run the economy well, but we just don't have those advantages, but that's all good news for New Zealand because there's a lot of crumbs come off the Australian table that we can take advantage of. Australia is going to fight to keep its manufacturing sector because its exchange rate is going to stay strong or strengthen, and as that happens that's a lot of opportunities for us. I think that's how we should be looking at it.

GUYON So the government should abandon its goal of catching Australia by 2025, you're saying it's a waste of time?

ALAN Oh it's up to government what their goals are, but to me the most interesting thing is how can we take advantage of Australia's good luck.

GUYON Australia's a threat too though according to some, I mean Bryan Gaynor writing in the New Zealand Herald yesterday, he points out that unemployment among 15 to 24 year olds here is 18.4% where in Australia it's 11.4%, I mean what's to stop those young people simply going after a better job market and better opportunities in Australia?

ALAN Oh well I mean there's nothing and some of them will and some of them will benefit from it, and some of them will bring skills and money back again as well. We're different economies, we're different countries, and different lifestyles more and more, and that's just something we've got to operate within, but that's you know part of a bigger issue for New Zealand.

GUYON In a simple way we get richer by selling more of our goods overseas, our exporters are key to our growth, yet a big big hurdle for them has been the level of the New Zealand dollar. I mean a decade ago fair value of the New Zealand dollar was 50 cents against the US and importers would scream if it got much lower and exporters would scream if it got much higher. We've been hovering around 70 cents against the US for a couple of years now, is that now fair value for the New Zealand dollar 70 cents?

ALAN Well not necessarily, I mean that's complicated and it depends who you are. If you're a dairy farmer it's quite a different sort of equilibrium value than if you're a manufacturer or someone else, so it does get a bit complicated, but more and more New Zealand exporters have dealt with that, they've hedged, they're quite clever in the way they deal with it. If you're exporting to Australia you're not necessarily disadvantaged, if you're importing products for your product in US dollars it can be very helpful, so we haven't done too badly out of that even though we still think it is a bit strong,

GUYON So you think the Kiwi is a little over valued at 70 cents?

ALAN We think it is on fundamentals yeah.

GUYON What's fair value for the New Zealand dollar?

ALAN Well you can measure that in a number of different ways, so I'm reluctant to give you an actual number on that, but it's a bit below that number.

GUYON Alright, well that's a good place to leave it, thank you very much for coming in and joining us this morning Alan Bollard, we appreciate your time.

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