Interest Rates Show Framework Working

  • Bill Birch

The continuing decline in interest rates - lowering costs to households and businesses - shows New Zealand's economic framework is adjusting very well to international events, Treasurer Bill Birch said today.

Mr Birch was commenting after returning from the International Monetary Fund/World Bank meeting in Washington DC.

"It is clear that New Zealand faces a very volatile world economy for some time yet. There are still many downside risks as the Asian Crisis flows through to effect even those countries like the United States which thought they were immune."

Mr Birch said New Zealand is a far bigger trader than most other countries - 22% of our GDP comes from exports - and we had far more direct trade exposure to Asia. Up until last year 40% of our exports went to Asia.

"As a result, the Asian Crisis hit us much earlier. Already we have lost a full year's growth with the negative quarters in March and June. Our fiscal buffer, the Budget surpluses, have also disappeared.

"However, New Zealand's open economy means we are adjusting very well to the largest economic shock for decades.

"We have not had the shocks of sudden currency devaluation, sharemarket and business collapse, rapidly escalating unemployment, and high inflation that we've had in the past or that have hit countries like Korea and Thailand.

"If the Government was trying to manage the exchange rate, that is exactly what would have happened.

"Imagine where we would be if we hadn't reformed our economy and got rid of our net foreign currency Government held debt.

"The international view is that our economy is now highly competitive and we can weather the storm in good shape short of a substantial collapse in the world economy.

"The market-led lowering of our exchange rate and interest rates over the past 12 months is one of the key factors that will drive a return to economic growth."

Mr Birch said the fall in floating mortgage interest rates to 6.95% from 11.25% this year was worth $127.76 a fortnight or $3,321.76 a year on a $100,000 mortgage.

"Obviously, this is an important gain for families, and cheaper capital is a real plus for businesses. "But with the uncertain world outlook, to avoid plunging into debt or raising tax rates, we need to continue to promote prudent fiscal policies to rebuild the buffer of surpluses.

"And we need consistent economic policies to further increase our international competitiveness. "This will drive higher growth in our economy and deliver more jobs and improved incomes for New Zealanders.

"The Labour Party's endless announcements of more spending is exactly the wrong signal for New Zealand today and will push interest rates back up and increase the borrowing pressure on the government."