Business

Reserve warns on cross border finance

13:36 pm on 23 October 2014

The Reserve Bank governor says facilities to move money between countries can offer both enormous benefits and big risks.

But Graeme Wheeler today told a conference in Wellington on what's known as cross-border financial linkages, they can also lead to exaggerated exchange rate movements, and cause persistent and damaging deviations from economic fundamentals.

Reserve Bank Governor Graeme Wheeler. Photo: RNZ / Diego Opatowski

Mr Wheeler said cross-border financial integration can help ensure resources are efficiently allocated, smooth consumption and diversify risk.

He said such links can also support the global transfer of skill-enhancing technologies and finance innovation and catch-up technologies.

But such links can amplify financial market shocks, he said.

He said New Zealand has experienced a rise in its real exchange rate in recent years, generating difficulties for exporters and for firms competing against cheaper imports.

Mr Wheeler said the best policy response to reduce this pressure is to increase domestic savings and undertake reforms that raise productivity and improve competitiveness.

He said changes to the exchange rate regime and capital controls are not the answer.

The governor said the Reserve Bank's restrictions on providing mortgages to people with small deposits, introduced more than a year ago, have significantly reduced housing market and consumer inflation pressures.

He said that has allowed him to delay raising interest rates which has reduced the incentive for any additional capital inflows into the New Zealand dollar in search of higher yields.