Emerging market depreciation poses risk for New Zealand economy

The flow of capital from emerging markets could pose a risk to New Zealand's economic recovery, a leading independent economic think tank warned Wednesday.

"Emerging market risk has flared. Rising U.S. bond yields are reversing capital flows to emerging markets. Many emerging market currencies are depreciating sharply as a result," New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said in a statement.

A repeat of the 1997-1998 Asian financial crisis was possible and should be considered as an economic risk, he said.

While the New Zealand economic recovery from a deep and long recession was strengthening, mostly on the back of domestic momentum, rapidly rising house prices in Auckland were also a risk.

The Reserve Bank of New Zealand (RBNZ) had restricted high loan- to-value mortgages to 10 percent of new lending from Oct. 1, but if this failed to rein in the housing market, the central bank would raise interest rates.

"The RBNZ does not want to raise interest rates. Inflation is low and global risks are still high. Slowing growth in China and Australia are most pressing," said Eaqub.

Shamubeel Eaqub

New Zealand Institute of Economic Research principal economist