WELLINGTON, Nov 11 (Reuters) - The strength of the New Zealand dollar is not sustainable but at current levels may hinder a further narrowing of the current account deficit and so economic recovery, the central bank said on Wednesday.
The currency has jumped 50 percent against the U.S. dollar since March but the central bank says that doesn't reflect an economy emerging from recession.
The New Zealand dollar briefly slipped following the central bank's remarks that were contained in its twice-yearly report on the financial system.
The report also said that New Zealand's financial system had stabilised in the past six months and credit markets had improved, but that risks remained elevated and further shocks were likely.
It said economic structural imbalances, such as a reliance on foreign borrowing and weak national savings levels, remained. The report made no direct mention of monetary policy.
'The rise in the New Zealand dollar over recent months could hinder continued improvement in the external balance,' Reserve Bank of New Zealand Governor Alan Bollard said in a statement.
The New Zealand dollar briefly fell to $0.7405 after the statement but returned to settle largely unchanged around $0.7420. Bank bill futures and swaps were unchanged.
New Zealand's current account deficit has narrowed to 5.9 percent of gross domestic product in the year to June from around 9 percent a year earlier, as the country's longest recession on record dented earnings for foreign investors and caused a slump in imports.
In July, Fitch ratings agency cut its ratings outlook on New Zealand to negative from stable, citing the current account deficit and high foreign liabilities.
The central bank has regularly complained about the strength of the New Zealand dollar, or kiwi.
BNZ senior strategist Craig Ebert suggested that for now Bollard was not signalling any intention to take action to calm the currency's ascent, which was largely the result of external factors anyhow.
'All he's saying is that it's not helpful and we need to keep an eye on it if it gets towards problematic territory,' Ebert said.
IMBALANCES
Addressing the economic imbalances, Bollard said the country was vulnerable to any new external shocks. It needed to save more, reduce foreign borrowing, and look at issues such as tax loopholes, which have favoured property investment.
'We need to ensure there is no return to a debt-fuelled housing cycle, which would likely bring with it further exchange rate pressure and erosion of competitiveness,'he said.
The central bank said it did not expect the recent growth in house prices to continue, and it would encourage banks not to return to risky lending practices.
It made no direct mention of monetary policy, but said the fiscal and monetary stimulus, which had boosted global markets, could not be kept in place forever.
Last month the RBNZ held interest rates at a record low 2.50 percent and said it was in no hurry to raise them, expecting to hold them at the current level until the second half of 2010.
Finance markets though see the outlook differently and have priced in a rise in the rate as soon as March 2010, betting the central bank will be forced to tighten policy as an economic recovery takes hold.
'There's precious little here for monetary policy, we know rates are going to rise but in all likelihood not as fast as the market is thinking,' BNZ's Ebert said.
A string of data -- retail sales, housing, consumer and business confidence -- has pointed to a rebound in the economy, which emerged from recession in the three months to June 30 after five straight quarters of contraction.
The central bank report said New Zealand's banks had come through the global credit crisis in relatively good shape, although the quality of their assets had weakened, and further loan losses were likely as unemployment continues to rise.
It said banks had increased their lending, albeit with tighter conditions, as markets returned to normal, but warned they should not be too strict with businesses.
((gyles.beckford.@thomsonreuters.com; +64 4 471 4231; Reuters Messaging: gyles.beckford.reuters.com@reuters.net)) Keywords: NEWZEALAND ECONOMY/RBNZ (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
© 2009 AFX News
