RBNZ Governor Wheeler: Scope to Ease If Global Growth Slows

--Wheeler Says New Zealand Has Room on Interest Rate, Balance Sheet, Fiscal

Fronts

     SYDNEY (MNI) - Prospects for continued growth in the New Zealand economy

look promising but if global growth slows, the Reserve Bank of New Zealand has

the scope to ease monetary policy to support the economy, Governor Graeme

Wheeler said Wednesday in what could be his final address as head of the central

bank.

     The speech, titled "Reflections on the Stewardship of the Reserve Bank" was

delivered to the Northern Club in Auckland. Wheeler's five-year term ends

September 26.

     "In the absence of major unanticipated shocks, prospects look promising for

continued robust economic growth in New Zealand over the next two years,"

Wheeler said.

     But "if growth in the global economy slows, we have some scope to buffer

our economy," Wheeler said, referring to room on leeway on both the monetary and

fiscal fronts.

     Wheeler noted the official cash rate at 1.75% is well above the zero, in

contrast to  the negative interest rates supported by several advanced country

central banks. In addition, the RBNZ has room on its balance sheet to support

more stimulus, if needed.

     The "bank has not grossed up its balance sheet by buying domestic assets,"

Wheeler said, adding, "With a budget surplus and low net debt relative to GDP,

there's also flexibility on the fiscal policy side."

     The greatest risk New Zealand faces at this stage relates to inflated

global asset prices and the continuing build up in global debt, he said.

     The main domestic risk would be a sharp decline in net immigration, as this

would slow domestic growth by reducing employment and demand growth, Wheeler

said. The RBNZ's forecasts assume net immigration of 140,000 people over the

next three years which would be a further 3.5% boost in working age population.

Since early 2012, New Zealand has seen 6% growth in working age population due

to net immigration, which has had a positive net demand effect on the economy.

     A second key risk relates to a possible resurgence in house price

inflation, as this would increase the risk of a subsequent correction.

     "Although house price inflation has slowed markedly, a further surge in

house prices can't be ruled out as mortgage rates are low, net migration flows

are strong and large supply and demand imbalances remain in the housing market,"

Wheeler said.

     At the same time, he said it's encouraging that nation-wide annual house

price inflation has fallen from its peak of 21% in August 2015 to 1% currently.

Macro-prudential policy limits on mortgage loan-to-value ratios (LVR)

contributed to this slowing and the RBNZ will ease the limits once there are

signs that financial stability risks have eased and it feels confident that the

removal of limits won't lead to resurgence of risks, he said.

     "On the former measure, the financial risk picture is improving. Banks are

carrying a lower share of high LVR mortgages as a result of the LVR limits

having been in place, and the slowdown in house price inflation is positive -

although prices remain very elevated relative to incomes and rents," Wheeler

said.

     The main risk on the international side, apart from unanticipated major

geo-political developments, lies with the build-up of global debt, Wheeler said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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