Reserve Bank Email Service
FYI the RBNZ just released this news release.
NEWS RELEASE
Date 7 March 2008
Time 2:00pm
Challenges for small open economies in uncertain times
The past decade has highlighted challenges that small open economies like New Zealand face in trying to run monetary
policy in a connected world, Reserve Bank Governor Alan Bollard said in remarks to be delivered at an International
Symposium at the Banque de France in Paris on 7 March.
Over the past decade, the 'global savings glut', generally declining interest rates and a search for yield drove up
exchange rates for many small open economies such as Australia and New Zealand, Dr Bollard said. This helped fuel a
sharp increase in house prices in many countries, as well as possible collateral damage on exporters.
"Global interest rate developments have sometimes been 'out of sync', lower than domestic conditions warrant, and
working against monetary policy, making it spongier, and perhaps less effective at the margin than would otherwise be
the case," he said. "We have not always had an ideal mix of monetary conditions."
Dr Bollard said that conditions were changing rapidly, however, with a marked shift away from risk-taking and the
pursuit of yield to heightened risk-aversion.
Though New Zealand has not seen the development of the complex financial instruments at the heart of the US's current
financial problems, it is affected by the sharp changes in interest rates, credit spreads and exchange rates that have
occurred recently.
"We face some quite difficult judgements in assessing how policy settings and global conditions will affect domestic
economic activity and inflation in the months ahead.
"Uncertainty surrounds the future of the carry trade, the likely path of the exchange rate over the months ahead, and
the nature of the projected housing slowdown. Clearly, the path of global interest rates from here on will have some
bearing, given their influence on bank funding costs."
Dr Bollard said global market developments also have important ramifications for financial system stability in smaller
open economies. Recent events have highlighted some risks and vulnerabilities that institutions and regulators need to
ensure are properly managed.
"Banks have used a significant amount of short-term funding to minimise costs. We want to look at whether the
vulnerabilities that this can create have been adequately priced and managed - noting that some of the costs of a
liquidity event are probably externalities that would ultimately be borne by other New Zealand parties.
"Our institutions need to be able to cope with sharp changes in the cost of funds in the global market place," he said.
"But as we saw in July last year, we also need to confront the possibility that global funds may not always be as
readily available as we perhaps used to think. The management of funding and liquidity risk by financial institutions
are two areas that are likely to receive considerable policy attention in many countries over the coming months."
You can read the Governor's remarks at the following link:
http://www.rbnz.govt.nz/speeches/3258689.html
ENDS