donald t brash : an indebted people speech by mr donald t brash, governor of the reserve bank of new zealand, to the canterbury employers'chamber of commerce, canterbury, 25 january 2002. * * * mr chairman, ladies and gentlemen i am delighted to be here again for my ninth annual address to the canterbury employers'chamber of commerce. last year i spoke to this audience about what goes on " behind the scenes " in formulating monetary policy at the reserve bank, and over the years i have addressed a wide range of topics. in 1998, i talked about new zealand's balance of payments deficit and its relevance to policy - makers. the topic of that speech was " new zealand's balance of payments deficit : does it matter? " i want to return to this topic today, from a slightly different tack. as part of our brief to watch out for things to do with financial stability, we in the reserve bank have been doing some thinking recently about new zealand's dependence on foreign capital and some of the risks that that exposes us to. ( as an aside, it seems fitting to be addressing this topic in christchurch this year, as my own masters thesis, submitted to the university of canterbury forty years ago this year, was entitled " new zealand's external debt servicing capacity " - although i am bound to say my understanding of the issues has evolved considerably since that time! ) just how dependent are we on foreign capital? by international standards, and by our own historical standards, new zealand is unusually dependent on foreign capital. since the mid - 1970s, new zealand has consistently spent more on goods and services from abroad, including the income paid to the foreigners who have provided us with capital, than it has earned from exports. it has, in other words, consistently run a current account balance of payments deficit. each of these deficits has had to be financed by capital inflows of one kind or another. source : statistics new zealand speech to canterbury employers'chamber of commerce, 30 january 1998. see, for example, the article " international capital flows, external debt, and new zealand financial stability " in the december 2001 issue of the reserve bank's bulletin. four years ago when i talked about the current account, the deficit stood at 6. 4 per cent of gdp, then one of the largest deficits in the world relative to gdp. in fact, the deficit deteriorated further, peaking at 7. 0 per cent of gdp in the

system raised its funds rate. additionally, bearing in mind the achievements made in the past nine months, we revised upwards our projection of the foreign direct investment net inflow for this year again, from 1. 7 billion euros to 2. 1 billion euros. that means that the expectation is that this year foreign direct investment will be at the level of around 5. 5 % of gdp, exceeding the current account deficit for the third year in a row. at the same time, this contributes to the rebalancing of our economy, leading to more dynamic exports, which record two - digit growth rates, owing to new projects and expansion of the exports base. manufacturing, which is the most propulsive part of our economy, has been recording diversified exports growth of 13. 6 % year - on - year in the first nine months of this year. even though exports increased in almost all areas, the most significant contribution to this growth stemmed from the production of base metals, rubber and plastic products, machinery and equipment and chemical products. in the coming period, the emphasis should be placed on maintaining the achieved results, further improvement of the business ambience and further enhancement of the competitiveness of the domestic economy through structural reforms. further monetary policy easing in the conditions of low inflationary pressures, with the reduction in the cost of government borrowing in the period following the last inflation report, we have lowered the key policy rate two times, in september and october, by 50 basis points in total. hence, the key policy rate was lowered to 3. 5 %, which is its lowest level in the inflation targeting regime. the decision to proceed with monetary policy easing was driven by additionally subdued inflationary pressures, and the fact that resilience of the domestic economy to external shocks increased, owing to favourable macroeconomic performance. low inflationary pressures are indicated by low and stable core inflation, moving around 1. 5 % year - on - year, the same as at the end of the previous year. the impact of the drought on food prices was also less pronounced and the second - round effects on other prices were absent, which is also confirmed by inflation expectations within the target tolerance band. according to our latest projection which takes into account past monetary easing and the public sector wage and pension increase, inflation will continue to trend within the target tolerance band of 3±1. 5 % until the end of the projection horizon. chart 2 interest rate movements ( daily data, p. a., in % ) chart