By Alex Tarrant
The Reserve Bank of New Zealand has taken a huge swipe at the level of the New Zealand dollar, saying although the high currency helps contain inflation, it is detrimental for the country’s tradable sector, undermines GDP growth, and inhibits rebalancing.
And there is a risk that global central banks keep depreciating their countries’ currencies, which could see the New Zealand dollar rise even further. However the RBNZ said its central projection was for the NZ dollar to fall slightly over the next three years.
The Reserve Bank also noted that if the currency did continue to rise to a point where it was bringing down its future inflation expectations, there was always the prospect of cutting the Official Cash Rate, which it left on hold today at 2.5%.
The New Zealand dollar has risen 7% on a Trade Weighted Index (TWI) Basis since the Bank’s last Monetary Policy Statement (MPS) in December. This morning the TWI sat around 72.5 – a level at which the Reserve Bank has intervened in currency markets before, although back at its major intervention in 2007, commodity prices were considerably lower than they are now.
Today, the Bank gave itself considerable space in its Official Cash Rate commentary, and in its March quarter MPS, for remarks on the level of the currency.
Monetary policy easing, including quantitative easing, or money printing, by central banks around the world had lead to an improvement in global risk sentiment, causing the NZ dollar to increase “substantially”.
“This appreciation has occurred at a time when New Zealand’s export commodity prices have tracked sideways. There is a risk that this dislocation continues,” the RBNZ said.
“Major central banks are likely to continue to expand their balance sheets, which could weaken their currencies further,” it said.
“While the strong New Zealand dollar is helping contain inflation, its high level is detrimental to the tradable sector. Based on the assumption that the exchange rate slowly depreciates over the next few years, all else equal, the Bank expects to modestly increase the OCR over the projected horizon [to March 2015].”
The high dollar would reduce the revenue received by exporters, which could translate into weaker capital spending by the primary sector, the RBNZ said.
“That said, there have been some recent signs of stabilisation in the world prices of New Zealand’s commodity exports, and prices remain at elevated levels. Oil prices have increased sharply recently, in part due to geopolitical concerns,” it said.
“The high New Zealand dollar is affecting trade volumes and production in the tradable sector; goods exports slipped back in the September quarter. Meanwhile, imports increased sharply, as cheaper New Zealand dollar import prices caused households and firms to switch expenditure.
“This switch is evident in the manufacturing sector, where despite exports exceeding the pre-GFC level, domestic production remains markedly down, suggesting that import-competing manufacturers are struggling,” the RBNZ said.
'If it keeps going up, we could cut the OCR'
New Zealand and a number of other small open economies were having their currencies driven quite high by a number of features, principally from offshore due to a considerable a amount of monetary stimulus from the major central banks around the world, Bollard told media at a press conference on Thursday morning.
“When that all happens we do worry about the potential for competitive monetary stimulus. It certainly would be a disappointment if we got this far through the global financial crisis without an outbreak of competitive trade barriers, as we have worried about, only to run into competitive monetary stimulus," Bollard said.
“We all know that there's a number of countries around the world who are quite concerned about this at the minute. They’re ones with their own currencies, it’s not just New Zealand. I’ll put in the same boat Australia, Canada, some of the Scandinavians, some of the Latin Americans, and some of the Eastern Europeans as well," he said.
“But, at least from our point of view, we do see that being driven at least in its recent manifestations primarily from interernational pressures, rather than from New Zealand pressures. In that sense it’s limited what New Zealand can hope to do about it.
"Of course, were we to see [a] strengthening New Zealand dollar, and were we to see that strengthen to a point where it was actually bringing down our future expectations of inflation, then we always still have the prospect of reducing the Official Cash Rate in response to that,” Bollard said.
(Updates with comments from press conference)
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