low global interest rates have kept longer - term rates in new zealand lower than usual and necessitated more tightening in the ocr. mortgage rates on upward trend in addition, late last year the banks in new zealand started cutting margins as part of a mortgage war. the australian - owned banks have enjoyed strong profits in new zealand for some years. they are now seeking to keep up the returns by capturing more business through active marketing of fixed rate loans. this has kept the housing market much more buoyant, unlike in their home country australia where floating rates predominate and the housing boom is over. so far our focus has been on the overall effects on the new zealand economy. but we also need to emphasise the position of certain households that are potentially at risk. about a third of households have mortgages, and one tenth of those are quite deeply in debt, already spending over half their disposable income on servicing their mortgage. these people are vulnerable to interest rates rising, property prices falling, or their employment positions becoming more fragile. later in november we will be releasing our financial stability report, which will comment on the housing sector in more detail. this presents us all with a challenge. strong housing activity and other consumption in this tight economy is starting to drive inflation higher. in addition, pre - election fiscal promises and coalition undertakings could fuel the strong domestic economy further if they happen in the near future. and, the big oil price rise is already increasing headline cpi, while second - round effects could drive inflation further. oil price shocks we are addressing these inflation pressures through higher interest rates. but at the same time this strong domestic demand is driving the current account deficit, which itself is partly exacerbated by the opportunities the relatively higher new zealand interest rates offer overseas investors in the new zealand dollar. how do we intend to manage these issues? our primary concern is inflation. we are already seeing signs of domestic spending slowing. last week we increased the ocr again and stated that we need to see more housing and consumer 2 / 3 spending moderation before we will be comfortable that inflation pressures are contained. we will be helped in this by the pressures to increase mortgage rates already in the pipeline, by the tightening international bond rates, and by the increasing sensitivity of indebted households to monetary policy. we will be watching closely for signs of further slowing over coming months. but we cannot reduce inflation and reduce external imbalances alone. there are other key players in this process,

alan bollard : housing debt, inflation and the exchange rate speech notes by dr alan bollard, governor of the reserve bank of new zealand, at an address to the employers and manufacturers association ( northern ) agm, wellington, 2 november 2005. the graphs for this speech can be found on the reserve bank of new zealanda€™s website www. rbnz. govt. nz * * * new zealand has enjoyed very strong growth over the last decade. gdp growth has averaged 3. 6 per cent over the last five years. but now it is starting to slow, causing some concern to businesses. we have enjoyed strong growth new zealand is an open economy and over the cycle we rely on important contributions from the export sector. but at the moment we observe that despite reasonable terms of trade the impact of net exports is weak, while the domestic sector has continued to grow extremely strongly, driving imports strength. driven by very strong domestic spending the inevitable upshot has been that the creditable positive trade balance we have enjoyed over the last decade and a half has now reversed. based on last week's trade data, the trade balance has now fallen to a deficit of 2 per cent of gdp. this trade deficit has been a principal ( but not the only ) reason for the severe fall off in the current account balance ( the balance of flows carried in the country and abroad. ) our current account deficit has now reached 8 per cent, the worst figure since 1986 and very marked by oecd standards. contributing to negative external balances another way of looking at this is to say that we are consuming and investing much more than we are saving. the government has had a strong saving record over the last decade, and more recently the business sector has been saving too. but the household sector, which represents a large part of the economy, has been running down its savings in spectacular fashion. while we may contest the validity of some of the data, there is little doubt we are now dissaving at about 12 per cent, very low by oecd standards. and very weak household savings an important part of what is going on relates to housing. over the last five years as capital has appeared cheaper and mortgages have become more accessible, the household sector has participated in a large housing boom, including : first time home buyers ; others trading up ; additions and alterations ; second homes ; investor houses ; investor apartments ; and rural property. the outcome has been unsustainably high house