IMF backing us - English

Finance Minister Bill English claims the International Monetary Fund is backing the Government's approach to fiscal policy.

''As the IMF notes in its concluding statement issued today [Tuesday], New Zealand's economic expansion is becoming increasingly embedded and broad-based. It forecasts annual economic growth will increase to about 3.5% this year,'' he said.

The the IMF report highlighted rising house prices and a slowdown in China as the greatest risks to New Zealand's economic growth.

New Zealand's growth prospects had improved for the near term, with business and consumer confidence strong, and commodity prices for key exports high.

However, it warned New Zealand remained exposed to some external risks, in particular a sharp growth slowdown in China.

''About two-thirds of New Zealand's exports of goods go to China, Australia, and other parts of Asia. As such, any adverse development in the region would have a substantial impact on New Zealand's terms of trade,'' the IMF said.

On the domestic front, the housing sector was a ''pressing'' risk.

''With house price inflation running high, there remains the risk that expectations-driven, self-reinforcing demand dynamics and price overshooting could take hold.

''The Government's steps to help alleviate supply bottlenecks, measures to tighten standards for mortgage lending, and an increase in mortgage rates should help ease price pressures.

''But a sudden price correction - possibly triggered by a shock to household incomes or borrowing costs - could reduce consumer confidence, impact overall economic activity, and hurt banks' balance sheets,'' the IMF said.

Mr English said it was encouraging the IMF had again noted the Government's macro-economic framework remained sound and provided policy space to respond to adverse shocks.

''In particular, it concluded the Government's focus on returning to surplus next year will help to preserve its favourable standing with external creditors against New Zealand's background of relatively high net foreign liabilities.''

Mr English agreed with the IMF that New Zealand faced some risks, including globally from any downturn in the fortunes of China and the rest of Asia, and on the domestic front from issues around housing affordability.

The Government's steps to help alleviate housing supply bottlenecks and the Reserve Bank's measures to tighten mortgage lending and to raise interest rates should help to ease house price pressures, he said.

The Government's deficit reduction programme was also expected to take some pressure off the exchange rate.

''This latest report on New Zealand confirms we remain on the right track to build a faster-growing economy and to manage the global and domestic risks that might come our way,'' Mr English said.

Prime Minister John Key said the Government was conscious of the issues associated with the heated housing market.

''I think we are addressing it in the right way. We're certainly working hard on the special housing areas. We're certainly working hard on making sure that consenting is rising.

"We're putting every incentive in the market to have more homes built. We're continuing to overhaul and reform the planning process,'' he said.

Labour finance spokesman David Parker focused on the International Monetary Fund ''admitting'' the New Zealand dollar was overvalued by up to 15% and suggested, while care must be taken, there was room for innovation on monetary policy.

''That's crippling for exporters and it's holding our economy back. The IMF has now admitted there is scope to change the Reserve Bank Act with head of the IMF mission Brian Aitken saying, `there might be ways to innovate but you would want to be careful'.''

Labour was committed to upgrading the Reserve Bank Act as part of its Economic Upgrade policy, which would be released soon, Mr Parker said.

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