Households resuming their "borrow and spend" habits before paying down existing debt posed a clear medium-term risk to the economy, Reserve Bank governor Alan Bollard said yesterday.
The borrow and spend habit could be triggered by renewed moderate house price inflation and should be avoided.
"With slower growth in household income expected, households would have to reduce spending growth to repay their debt. Reliance on past experience of strong house-price inflation and easy credit will be untenable."
Household savings, investment in the tradeable sector and deeper funding markets were the key to the country's economic recovery, Dr Bollard told a Hawkes Bay business audience.
Early signs of a global recovery had emerged and the world had avoided a repeat of the Great Depression.
However, world growth would be subdued for the next one or two years. The current low international interest rates, expansion of liquidity and central bank balance sheets and fiscal stimuli would continue to be necessary.
"New Zealand looks likely to start recovering ahead of the pack. But this is an opportunity to rebalance."
Achieving the sort of recovery needed would be assisted by first, greater savings by the household sector to reduce the need for foreign funding; secondly by investment in the economy's productive base, particularly in the tradeable sector; and thirdly by greater durability and depth in funding markets, including a lengthened maturity structure for bank funding, he said.
A priority over the coming year or so would be for New Zealand banks to diversify their funding sources more and to increase the proportion of stable funding sources, including long-term wholesale borrowing and retail deposits.
