By Alex Tarrant
The Reserve Bank says the New Zealand dollar is stronger than it wants to see, and has hiked its projections for the currency over the next few years.
In its December Quarter Monetary Policy Statement, the Reserve Bank projected the Trade Weighted Index - showing the New Zealand dollar against a basket of trading partner currencies - would maintain its level above 71 through its projection period to the March 2015 quarter.
The December MPS showed a big shift from September projections, which showed the TWI falling below 70 midway through 2014.
The currency rose by almost half a US cent on Thursday morning following the release of the Reserve Bank's latest forecasts.
Reserve Bank Governor Graeme Wheeler said the exchange rate was stronger than the Reserve Bank wanted.
“We would like to see the exchange rate lower, if we could achieve it without threatening the inflation outlook and also financial stability," Wheeler told media at a press conference at the Reserve Bank on Thursday morning.
“If you look back over a long sweep of history, there’s a close relationship with the terms of trade. But we’ve seen the terms of trade decline now, for five quarters - commodity prices are starting to pick up, and they’ve picked up over the last five months or so. But you see the exchange rate remaining very strong, and doing considerable damage to the traded goods sector, particularly manufacturing and also import-substitution," Wheeler said.
The high currency had been driven a lot by injections of global liquidity – that is, quantitative easing – from the major economies.
“There seems to be a close relationship between the pick-up in overseas share markets – world share indices, particularly in the US – and a pick-up, in turn, in the exchange rate pressures faced by countries that have reasonably sound monetary policy, good growth prospects, and reasonable prospects in terms of commodity price outlooks," Wheeler said.
Asked if the Reserve Bank had looked at ways to mitigate the effects of global liquidity injections, Wheeler replied:
“In terms of the liquidity injections that are coming from overseas, those sorts of pressures, there’s not a lot directly that we can do about that.
“The issue is, what can we do to try and alleviate exchange rate pressures? There are circumstances in which the central bank could intervene, but we’ve yet to find situations which meet all our ‘traffic lights,’ if you like, at this point.
“Other governments have looked at capital controls. We don’t think that’s appropriate for New Zealand," Wheeler said.
“So in essence, it’s something that a lot of countries that have better growth prospects and have rising commodity price outlooks and reasonably sound macro policy, they’re facing upward pressure on the exchange rates And it is hurting their traded goods sectors in many of their economies," he said.