16 Sep 2011

High kiwi damaging parts of economy - Bollard

4:30 am on 16 September 2011

Reserve Bank Governor Alan Bollard says the high New Zealand dollar is damaging some parts of the economy.

The comments to a Parliamentary select committee came after he left the Official Cash Rate unchanged at 2.5% earlier on Thursday.

Dr Bollard says exporters importing raw materials in American dollars and selling to Australia are doing well.

But he concedes many other firms selling overseas are struggling in the face of the high kiwi.

He says last week's decision by Switzerland's central bank to peg the Swiss franc was one example of how a surging currency could be tackled.

Dr Bollard says the Reserve Bank is watching anything that other relevant countries do, including what the Swiss bank is trying to do.

In announcing there would be no change to the OCR, Dr Bollard said that while the bank was surprised by the strength of the recovery in the New Zealand economy in recent months, turmoil on world financial markets had increased the chances of a sharp slow-down in global economic activity.

Deteriorating market sentiment could flow through to New Zealand banks' funding costs, although he said there was little sign of that happening yet.

Dr Bollard said recent global developments had only a mild impact on the New Zealand economy, it was likely the OCR would need to increase.

Global uncertainty alone keeping rates down

UBS senior economist Robin Clements says interest rates would most definitely be going up if it weren't for the global uncertainty.

He says the central bank will now have to wait and see how global turmoil affects the domestic economy.

He says while the world may go from crisis to crisis, it is conceivable that the impact on New Zealand, through its trading partners and bank funding costs, may still be mild.