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Country Briefs: Sustained Sound Policies Bode well for New Zealand

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2006
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Following a vigorous expansion in recent years, a cyclical slowing in New Zealand’s economy began in 2005, and growth declined to 2¼ percent, the IMF said in its annual economic review. With the exchange rate reaching a post-float record high in December, the slowdown affected the tradables sector most heavily, and the external current account deficit widened to twice its 20-year average. At the same time, an unexpected revival of the housing market sustained domestic demand, which, along with higher oil prices, pushed inflation slightly above the medium-term target range of 1 to 3 percent.

More recently, domestic demand growth has slowed and the exchange rate has declined. Against this backdrop, growth is likely to be sluggish in 2006 but is expected to recover in 2007, led by exports. With slower growth easing resource pressures, inflation is expected to moderate, allowing for an eventual easing of monetary policy.

The IMF Executive Board commended the authorities on their continued implementation of sound macroeconomic policies during a challenging phase in the business cycle and considered the current policy stance to be supportive of a soft landing for the economy. The Directors endorsed the government’s far-sighted conduct of fiscal policy, which has allowed the operating surplus to rise substantially during years of strong growth. They also saw monetary policy as well placed to accommodate the one-off effects on headline inflation of the recent exchange rate depreciation and oil price increases. At the same time, with the labor market remaining tight, they saw little room to cut interest rates in the near term but noted that there was scope to ease monetary policy if the economy slowed more abruptly.

The Directors welcomed recent steps to improve the financial sector regulatory framework and supported efforts to strengthen the monitoring of household debt-service capacity in view of the notable rise in that sector’s indebtedness in recent years. They also supported the government’s decision to develop a new regulatory framework for nonbank financial institutions.

New Zealand
2002200320042005Proj.

2006
(annual percent change)
GDP (production basis)4.83.44.42.20.9
Headline consumer price index (end of period)2.71.62.73.22.9
(percent of GDP)
OBERAC12.24.34.65.63.4
External current account balance–4.0–4.3–6.6–8.8–8.9
Nominal effective exchange rate2112.3126.0132.3135.9

Operating balance excluding revaluations and accounting changes—New Zealand’s indicator of current cash flow.

IMF Information Notice System index (1990-100).

Data: New Zealand authorities and IMF staff estimates and projections.

Operating balance excluding revaluations and accounting changes—New Zealand’s indicator of current cash flow.

IMF Information Notice System index (1990-100).

Data: New Zealand authorities and IMF staff estimates and projections.

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