strong consumption spending. strong consumption spending has in turn fuelled much of the demand for imports that has led to a widening of new zealand's trade deficit. in effect, we have seen a continued decline in the new zealand household savings rate - - the proportion of current income that households put aside to invest for future consumption. statistics new zealand figures suggest that on average households in new zealand do not actually save anything out of current income but instead dis - save to the tune of around 12 per cent of income per annum. of course, there is plenty of room to debate whether this is the most relevant or accurate saving statistic. 1 but comparative figures show that, typically, households in most developed countries save at least some of their current income. it is clear that the new zealand household sector stands out as having one of the lowest savings rates of any oecd country. for example, the blurred boundary between households and firms these days might suggest that total private savings, including by firms, is more relevant. another issue is that saving is measured as the difference between income and consumption, making it prone to measurement error in either of those aggregates. 2 / 7 figure 3 : household credit growing faster than income it is possible that households'expectations of the capital gains from housing have been so strong that many households have seen scope to unlock recent capital gains, whilst still expecting to be able to build up their equity sufficiently over the long - run to meet their savings goals. if so, they would have seen little need to save anything out of current income. obviously the success of this strategy will depend on the extent to which house prices do in fact continue to rise from here. the reserve bank has noted several times in the past few years that some households may have had unrealistic expectations in this regard ; indeed a fall in house prices cannot be ruled out. in australia house prices today are, if anything, lower than they were a year ago, certainly so in sydney. we are also conscious that there may be subtle changes occurring around what households regard as an acceptable target level of wealth in retirement. this may be driving current consumption and savings decisions. traditionally, the bequest motive has been a driver of many new zealanders'savings strategies. some baby - boomers may be opting to spend more of their accumulated wealth during their lifetime and not make a significant bequest. it is also possible ( but hard to gauge ) that some households have viewed the recent increase in government savings ( i

. e. fiscal surpluses ) as a sign that they can afford to save less themselves. figure 4 : households consuming from debt 3 / 7 recourse to debt - financing has been an important part of the process. despite an official cash rate that has been high by international standards, households appear to have been very willing to increase debt levels to fund their housing and consumption activity. strong competition among home loan providers - - which has meant lower home loan rates than might otherwise be the case - - has certainly done little to discourage households in this regard. in some cases, interest rates for fixed - rate home loans appear to have been priced below the all - up cost of lending, as lenders have competed for market share. lenders have clearly seen home loans as a relatively low risk activity and have priced loans accordingly. figure 5 : effective mortgage rate household behaviour is not the only influence on the current account. the rise in the exchange rate over the past few years has reflected rising commodity prices, new zealand's strong relative growth performance and our correspondingly higher interest rate structure relative to the rest of the world. the high exchange rate has reinforced the widening of the current account deficit, placing pressure on export sector revenues, whilst making imports relatively cheaper. although the factors behind the appreciating exchange are easy to identify, what has been surprising has been the continued willingness of investors to continue investing in new zealand dollars through the likes of eurokiwi and uridashi2 issues notwithstanding a growing consensus that the exchange rate has reached unsustainable levels. over the past year alone, we have seen an additional $ 20 billion of such issues, and demand has continued to remain very strong in recent months. flows into these two particular products were larger than was the case for any other currency. zealand see drage, d, a munro and c sleeman ` an update on eurokiwi and uridashi bonds ', reserve bank of new bulletin, 68 / 3, september 2005. 4 / 7 figure 6 : nzd since float new zealand is not the only country to have experienced a widening of its current account deficit in recent years. a number of others, including the us and australia have also experienced widening deficits. strong household demand has likewise been an important driving factor behind the increases although, as in the case of new zealand, not necessarily the only factor. however, new zealand stands out in one important respect. over time, current account deficits have to be financed