The strengthening New Zealand dollar threatens to overshadow recent gains made in international trade deficits as Reserve Bank Governor Alan Bollard calls for more belt-tightening.
As if to emphasise Dr Bollard's claims, just hours before the release of the Reserve Bank's annual report yesterday morning, the kiwi touched on a more than 14-month high of US74.5c as the US dollar weakened further.
Dr Bollard said while New Zealand had escaped major damage in the worst global financial crisis in decades, the experience had highlighted the "imbalances and vulnerabilities" of households borrowing heavily against home equity and "consuming beyond their incomes".
"In the past two years there has been a substantial correction in household savings and the external payments imbalance.
"However, further improvements will be needed to stop our international debt position from mounting," Dr Bollard said.
As the global US subprime and then credit crisis unfolded during the past two and a-half years, Dr Bollard initially ratcheted up the Official Cash Rate to quell home-equity-led consumer borrowing, before aggressively slashing the OCR as recession took hold around the world.
ASB chief economist Nick Tuffley said the Government wanted to see an export-led recovery, as opposed to a return to an economy driven by house speculation and building.
"Our economic recovery is not sustainable if households dimly go back to what they did in the past," he said of becoming debt laden.
However, because of the deeper recession in the United States and United Kingdom, weakening their respective currencies, the kiwi was likely to stay high for the next year.
Dr Bollard said the recent strengthening of the kiwi against the greenback, the latter beset by a continued weakening, did not support a shift towards New Zealand's export and import-competing industries which will be necessary to improve the situation. The Reserve Bank's total assets increased during the year to June by about $6 billion to total $31 billion, with equity at $3 billion.
Dr Bollard said that significant reductions in interest rates and exchange rates in the 2008-09 financial year meant the Reserve Bank recorded a net profit of $906 million and paid a dividend of $630 million to the Government.
"This is a strong financial result which reflects abnormally large changes in market conditions," Dr Bollard said.
However, he warned that the bank's future performance could be expected to be more volatile than in recent years.
