The governor of the Reserve Bank of New Zealand Alan Bollard is presiding over one of the world's he...
The governor of the Reserve Bank of New Zealand Alan Bollard is presiding over one of the world's healthiest economies. It is about to enjoy its 10th consecutive budget surplus, growth is stable and Bollard has plenty of room to cut interest rates if things get rough.
It is an enviable position in which to be. Even as risks including war, deflation, terrorist threats and Sars challenge policymakers as rarely before, Bollard is not panicking.
Investors are noticing, not least George Soros. The billionaire hedge fund manager told CNBC he is betting the US dollar will fall versus the New Zealand, Australian and Canadian dollars. It is rare to see such a high profile financier give a nod to a small economy like New Zealand, and it is about time.
The reasons Bollard is not stressed out these days ' like many of his peers ' are exactly those drawing Soros' attention. In a world plagued by sluggish growth, deflation and dysfunctional banking systems, New Zealand is holding its own. While investors worry the economy will slow to a 2% rate this year, folks in Germany or Japan can only dream of such growth.
In fact, New Zealand has benefited from a perception that it is a haven from global troubles, Bollard said, citing an increase in the number of tourists from the US, UK and Australia in April. More importantly, perhaps, the economy is being seen as 'a bit of a safe haven in terms of capital, too,' he said.
New Zealand's dollar is the second-best performing Asia-Pacific currency this year; it is up 11.5% versus the US dollar. The New Zealand dollar is up nearly 24% over the last 12 months, making it the world's 10th best-performing currency during the period.
The dollar's gains do not sit well with New Zealand Finance Minister Michael Cullen. He said its advance could be a risk to the strength of the growth of the economy over the coming two to three years.
It is already creating headwinds. Pilkington Plc, the world's biggest maker of car windshields, said it will close a factory in Wellington, citing competition from lower-cost countries and gains by the New Zealand dollar.
Yet the central bank's policies have served currency and bond investors well. Over the last 12 months, New Zealand's government bonds maturing in 10 years or more gained almost 45% in US dollar terms. Bonds maturing in seven years to 10 years are up more than 42% in dollar terms since May 2002.
Investors worried that they have missed the bond rally will be glad to know it may have further to go. The Reserve Bank of New Zealand has a high level of credibility with markets, which should help the nation continue to win foreign capital.
If a rising dollar is the most worrisome trend in the economy, then New Zealand should consider itself lucky. It can be corrected with lower borrowing costs. Bollard said that New Zealand rates are high by international standards but he added there is room for them to come down and plenty of ammunition to make it do so. New Zealand's official cash rate is 5.5%, while the Fed's benchmark rate is 1.25%.
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