those smaller economies like new zealand and australia which are facing relatively strong inflation pressures at present, that would ordinarily make the monetary policy challenge harder. on the other hand, higher credit spreads are actually increasing the effective cost of funds for many of our financial institutions and businesses accessing funds through the global capital markets. so we actually face some quite difficult judgements in assessing how policy settings and global conditions will affect domestic economic activity and inflation in the months ahead. despite increased global risk aversion, it is not yet evident that the carry trade is dead. we have still seen a relatively strong issuance in the new zealand dollar in recent months via uridashi bonds for example. the new zealand dollar remains at relatively high levels and has recently been at a post - float high against the us dollar, albeit largely reflecting the weakness in the us dollar itself. however, as one might well expect, exchange rate volatility has been high of late and there is perhaps more than the usual uncertainty around the likely path of the exchange rate over the months ahead. with banks ’ funding costs on the rise, mortgage rates have been increasing in new zealand and australia and in some other small open economies recently. this occurs at a time when new zealand ’ s housing market is already slowing due to the effects of past policy tightening. whilst we are projecting the housing slowdown to be of the soft landing variety, there is obviously some risk of a more pronounced slowdown. history shows us that either scenario can happen. clearly, the path of global interest rates from here on will have some bearing, given their influence on bank funding costs. of course, monetary policy is not our only focus. global market developments also have important ramifications for financial system stability in smaller open economies. the banks in many of these countries are net borrowers in global markets, new zealand and australia being two examples. recent events have highlighted some risks and vulnerability that institutions and regulators need to ensure are properly managed. we always used to talk about these risks but they have come into sharper focus. our institutions need to be able to cope with sharp changes in the cost of funds in the global market place. but as we saw in july last year, we also need to confront the possibility that global funds may not always be as readily available as we perhaps used to think. financial market liquidity policies and the management of funding by financial institutions are two areas that are likely to receive considerable policy attention in many countries over the coming months.

the overall picture materially. and our relative position in those league tables looks much worse than it did a decade ago. it is worth highlighting a few numbers. financial assets and liabilities are easier than most to get a good fix on. new zealand households'net financial wealth ( deposits, shares, unit trusts, pension funds, etc less household debt ) is estimated to be only around 70 per cent of our annual disposable income. in the bigger developed countries, that ratio averages around 270 per cent - even after the fall in international share prices last year. even allowing for the inevitable problems in putting together such cross - country comparisons, and for the possibility that international share prices still have some further adjustment to do, that is a large - and sobering - difference. put another way, the debt of the household sector in new zealand is very much higher, relative to the sector's financial assets, than in many other developed countries. household net financial wealth to income ratios 1990 - 2001 change 1995 - 2001 change us 261. 8 304. 7 333. 0 71. 2 28. 3 japan 260. 3 283. 8 356. 9 96. 6 73. 1 germany 130. 8 140. 4 150. 0 19. 2 9. 6 france 130. 6 184. 7 264. 4 133. 8 79. 7 uk 211. 8 291. 2 333. 2 121. 4 42. 0 italy 196. 3 217. 1 250. 0 53. 7 32. 9 g6 198. 6 237. 0 281. 3 82. 7 44. 3 australia 253. 0 218. 4 266. 0 13. 0 47. 6 new zealand 102. 7 108. 6 70. 4 – 32. 3 – 38. 1 per cent source : oecd, national sources, and ubs warburg. 2001 data are forecast, except for nz, which are 2000 actuals. household debt to household financial assets ratios 1990 - 2001 change 1995 - 2001 change us 25. 0 23. 6 23. 8 – 1. 2 0. 2 japan 3. 4 32. 7 27. 1 – 6. 3 – 5. 6 germany 34. 9 42. 5 41. 1 6. 2 – 1. 4 france 40. 3 25. 8 17. 3 – 23. 0 – 8. 5 uk 35. 6 24. 9 24. 4 – 11. 2 – 0. 5 italy 12. 9 12. 9 12. 9 0.