Roger J Kerr believes RBNZ Governor Adrian Orr is using the threat of negative interest rates as part of his 'jawboning' tactic to depreciate the value of the Kiwi dollar

Roger J Kerr believes RBNZ Governor Adrian Orr is using the threat of negative interest rates as part of his 'jawboning' tactic to depreciate the value of the Kiwi dollar
TALKING IT DOWN: RBNZ Governor Adrian Orr has been 'jawboning' the Kiwi dollar again, says Roger Kerr

Summary of key points:

  • Threat of negative interest rates pushes the Kiwi lower
  • Jawboning of the Kiwi down never lasts too long
  • RBNZ contention that a lower NZD benefits the economy does not stand up to scrutiny

Threat of negative interest rates pushes the Kiwi lower

Another week, another Reserve Bank of New Zealand (“RBNZ”) monetary policy statement and another dip in the Kiwi dollar as a result.

The NZD/USD exchange rate reacted adversely to the RBNZ monetary policy messaging, the Kiwi unit depreciating almost two cents from above 0.6100 last week to 0.5935 on Friday 15 May.

Over the last two years the RBNZ have consistently delivered a message to the financial markets, the business community and the public that an appreciation of the Kiwi dollar is bad for the economy and that further depreciation will assist them to achieve their dual objectives of stable inflation between 1% and 3% and stronger employment.

Up until recently the cutting of the OCR has been the method to reduce the attractiveness of the Kiwi dollar and cause it to fall. Now we have quantitative easing (“QE”) as an additional tool and the announcement that the amount of QE is to increase from $33 billion to $60 billion simply adds to the supply of NZ dollars and reduces its value.

The increase in QE was widely anticipated beforehand, so that was not the major factor in forcing the Kiwi lower last week.

The fact that the RBNZ have not ruled out negative interest rates in March 2021 if they need to go there, was designed to push the NZ dollar lower.

The jury is still very much out on whether negative interest rates are an effective monetary policy instrument to stimulate economic activity and lift inflation. The evidence from both Japan and Europe who have implemented negative rates over recent years would suggest very limited success.

The Reserve Bank of Australia have appeared to have dismissed negative interest rates as an effective method, citing that they do not necessarily change investor and borrower behaviour in the economy. Last week the US Federal Reserve also dismissed negative interest rates as a policy, Governor Jerome Powell stating that they “do not see negative interest rates as likely to be an appropriate positive response here in the United Sates”.

It is highly unlikely that the RBNZ would do the opposite of the Fed and RBA, therefore Governor Orr is merely using the threat of negative interest rates as part of his “jawboning” tactic to depreciate the Kiwi dollar. If we have to resort to negative interest rates in March 2021, it will be that the economy is still in one enormous hole due to the pandemic.

That scenario has a very small probability given all the current monetary/fiscal stimulus, close to Covid-19 eradication in New Zealand and likely preventative vaccines by year-end.

Jawboning of the Kiwi down never lasts too long

Any analysis of daily NZD/USD exchange rate movements over the last two years confirms that the RBNZ’s predisposition and preoccupation that a lower currency value is desirable and beneficial for the economy has not really worked.

The consistent pattern of NZD/USD movements is that the rate declines immediately on the RBNZ statement/OCR change, however within a few days or a week or two it is back to the pre-announcement level.

The impact is only ever short-term and temporary as the more fundamental forces on the NZD/USD exchange rate such as the USD itself, the Aussie dollar, commodity prices and economic data take over as the dominant determinants. The global equities market sell-off in mid-March due to the pandemic/economic shock causing the recent Kiwi dollar depreciation.

In 2018, the RBNZ’s 10 May, 9 August and 8 November monetary policy statements all caused very temporary dips in the Kiwi dollar.

In 2019, the statements on 8 May and 7 August (0.50% OCR cut) also resulted in the short-lived NZD depreciation.

The 13 November 2019 and 12 February 2020 statements were more positive affairs as the RBNZ belatedly realised the economy was travelling a lot better than they had earlier forecast. Due to the stronger economy, inflation increased to 2.8% by 31 March 2020, making a mockery of the 0.50% OCR cut in August 2019 which was designed to prevent deflation! Of course the Covid-19 pandemic and economic shock over recent months has saved the RBNZ from an embarrassing monetary policy boo-boo.

On the historical evidence, the current Kiwi dollar dip to 0.5935 should not last too long, particularly as the US dollar weakens on their rapidly deteriorating economic numbers and massive QE from the Fed.

One downside risk for the Kiwi dollar is the potential for another US equities market sell-off if it becomes clear that there is a second-wave of Covid-19 infections in the US as too many states re-open from lockdown too early (encouraged to do so by President Trump!). Let us all hope that that the second-wave does not occur.

RBNZ contention that a lower NZD benefits the economy does not stand up to scrutiny

As I commented in my mid-week FX market update to clients last week, if a constantly depreciating exchange rate value was the correct policy prescription to economic nirvana then Zimbabwe and Venezuela would be economic powerhouses and Switzerland would be a banana republic!

An examination of New Zealand’s GDP growth performance over the last 10 years also confirms that we produced increased growth to 4% pa when the Kiwi dollar was appreciating and strong from 2010 to 2015. GDP growth has reduced back to 2.5% over the last five years in a period when the NZ dollar has generally depreciated. Agricultural exports and tourism are dominant parts of our economy and the NZ economy performed to a higher level in the 2010 to 2015  period of currency appreciation, not depreciation.

The RBNZ’s rationale that we always need a lower NZ dollar to help the export sector and thus the economy, does not stand up to scrutiny.

The argument for a lower dollar value is that it helps profitable production growth and investment in the export sector and thus benefits the overall economy. As covered in last week’s column, the export benefits are often temporary and it forces exporters to sell on price alone, not quality and added-value.

Offshore buyers of our commodity exports simply drop their USD prices offered when they see NZD depreciation benefiting the NZ exporter. Most exporters want a stable exchange rate environment, not a volatile one caused by the RBNZ. Manufacturing exporters also like a higher NZD value from time to time as it allows them to buy new imported machinery at an entry cost that is viable and produces the required financial returns from the investment/asset.


Daily exchange rates

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Source: CoinDesk

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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"and likely preventative vaccines by year-end."

It is not at all "likely" that there will be a vaccine by year end, and almost completely impossible that if a vaccine does exist, any doses will arrive on NZ soil.


My thoughts precisely. There is zero chance of a vaccine by the year end, assuming we find one at all. I think he took that straight out of the Trump playbook.

Oxford University are saying they'll have a vaccine in September they can distribute to 30M britons. The key thing with their vaccine is that they are already producing it at scale right now, they're just waiting for human trials to confirm that it works. If it works then they could potentially deploy it very quickly.

But other than that, it seems unlikely anything will be confirmed to be working and distributable at scale this year.


The exchange rate is a secondary consideration.

Orr just wants to keep house prices at nosebleed levels.

So who's keen to revisit the benefits of Bitcoin again while you've still got some purchasing power?

Totally agree - A lower dollar just keeps our wages low compared to other first world countries.

But a low NZD would allow local-currency wages to rise without losing competitiveness. Then we can inflate away the debt.

Totally agree - A lower dollar just keeps our wages low compared to other first world countries.

finally --- a strong dollar is definitely a better thing for the economy - i have never understood why there is so much sentiment otherwise --( vocal vested interests maybe) The vast majority of New Zealanders benefit greatly from this- in terms of cheaper cars, whiteware, goods, used to include travel and holidays- and our exporters can hardly say it has threatened jobs -- as we had virtually no unemployment prior to COVID -- in fact we kept having to issue another 10 or 20000 work visas to get the crops harvested -- as not enough kiwis left who were able/willing to work- reset the graph to allow for the lag -- and clearly stronger dollar leads to stronger growth -

How do any of the examples you provided benefit the NZ economy? They all siphon money out of NZ rather than in to it? Agree an individual might get a cheaper XXXX but at an aggregate level it promotes funds to flow out of the country?

well when we start making cars again we can purchase locally --- and as much as i buy local where i can and use local tradies -- whiteware has about a 30% premium for F and P sourced goods of the same quality! far better to give a billion dollars ot Kiwibank so it can undercut the big four banks that remove billions of Kiwi dollars -- for nothing in return -- at least ordinary people NEED fridges, a TV and a car --

Try traveling overseas when the name dollar is weak. Or buying materials for houses from overseas. Ends up increasing inflation too


I have often thought about this argument regards lower $ for exports. Especially for NZ, as from my own perspective I thought NZ was too small to ever really succeed competing on price. We should have always been about quality, and aimed for a strong $.
Was extremely dismayed when GM was permitted, as it's not something that can be undone. Such is the power of big money writing our govts policy.
Currencies are constantly on a race to the bottom.
After years of trying to understand that, I am now starting to get it.
A privately owned central banking system can only survive if debt is continually increased, and constantly lowering the $ value is one of the key mechanisms behind this. It appears to balance out, as all central banks are assured that that others are acting in the same manner.
Privately owned central banking can only ever end one way, its a question of when, not if.
Unfortunately most people are unaware that the central banks are privately owned, otherwise there may be a much better understanding of why we have so much non"sense" in our financial system.

Come on, this is really weak. If you're going to draw conclusions about the relationship between the currency, exports and GDP, at least use a currency that reflects our trading partners (TWI or CNY). Also, I think you'll find the currency anticipates weaker GDP and trades lower ahead of this (leading indicator). Oh, and you need a longer observation period than the GFC to draw any meaningful conclusion.

His clients are import based. Never a bad word is heard

ahh ok, now it all makes sense, a stronger currency lobby group.

Yea. He has been saying this sort of thing since Kiwi was .75c

Having worked in both import and export its amazing at the psychological power the exchange rate has on spending decisions in this Country. I blame it on the generally unsophisticated, cost plus approach many NZ firms take to doing business. A smarter run business finds ways around the exchange rate it doesn't throw itself in bed with self convinced malaise at the first uptick. Therefore Orr is right to at least show some sympathy in that direction as he knows that once the exhange rate hits the 65 mark businesses here tend to freeze up and lose their confidence faster than the Auckland Warriors in the opening minutes of round one of every season...

but in reality -- how many businesses actual export ? and looking at the figures for the last ten years -- i dont see much freezing up from Dairy, meat, wine, kiwifruit, logging - in fact any of our primary industries whose exports have grown way way faster than inflation - adn those that rely on imports are all able top source product way cheaper -- so more competitive pricing for our consumer

If you want to look at stuff that has become MORE expensive in this country -- its Dairy products - $17 a kilo decent cheese at moment -- $5.50 for a small butter -- and building materials -- half of it the raw wood we export that we should simply mill here ourselves

Given that the government bails out our agricultural sector - for floods droughts, too much sun, cold in fact any little thing -- perhaps they could also ensure that basic food is supplied at cost to teh New Zealand market -- that might reduce child poverty quick to -- call it the price of government insurance!

Definitely agree with you on the acceptance of double standards when it comes to corporate welfare Vs social welfare. Child poverty is what happens when you stop caring about people.

Details, please, on how the government bails out agriculture for any little thing. I must have missed a trick somewhere along the way.

Even if it were true, farmers could probably argue they need some kind of reciprocal gift for all the rates and consents they pay to councils for no services at all.

It works both ways, when imported raw materials (not available from NZ) make up 70+% of the Cost of Goods of your product, just how do you suggest that we find ways around the exchange rate like you suggest the NZ exporters do?

Completely agree. Negative interest rates are completely idiotic, counter-productive and utterly self-defeating. The simple fact that the RBNZ is considering it as a theoretical possibility is a testament to their utter incompetence (unless they are just bluffing to keep the NZD low). As correctly stated by the author, many Reserve Banks have excluded this folly even as a theoretical possibility. Even within Europe, the majority of bankers and economists agree that negative interest rates are toxic in the medium/long term. They have been kept negative simply to allow basket case economies such as Italy and Greece to survive. Interesting to note is that, even with the devastation brought by Covid-19, the European Central Bank has refused to further decrease interest rates.
The real push behind further decreases of rates in NZ is the self-serving band of housing speculators and their friends, only interested in keeping this Ponzi scheme alive at all costs, regardless of the longer term impacts on the real productive economy. But the music has stopped.
Regarding the currency, the tricky issue to to determine what is the best balance for the NZ dollar with respect to a basket of currencies. This is not easy to determine. However a NZ dollar that is pushed too high or too low is dangerous and counter-productive. I would not put the issue in terms of "is a high NZ dollar good" versus "is a low NZ dollar good" - it is a question of finding the right balance according to the current conditions. In the current extreme conditions, I would tend to see a moderately lower NZ dollar as helpful. If this is what Orr is trying to achieve, good on him. But past experience has demonstrated that such efforts very rarely come to any consistent and durable fruition (Switzerland has tried to combat the strong appreciation of their currency with relatively deep negative rates, and even with direct intervention on the currency market, but with limited success). I personally think that the NZD will go lower, but not mainly as a result of the RBNZ's efforts.

Michael Reddell loves them. Just saying (not passing judgement either way)

Sweden did negative interest rates for a few years. They are not basketcase.
I'm not necessarily convinced by them, but nor am I necessarily unconvinced.
If they brought retail interest rates down to circa 2% then that could put more money in the pockets of existing (when they can switch) and prospective home owners. Which would obviously have economic benefits (and stimulate inflation).
Of course the downside would be property effects, but would we really see property go crazy again? Or would we just see little or no price decreases?
It would also weaken the currency and assist exporters.

But negative interest rates make the banks less profitable. If the banks are at risk then it's the government who ultimately picks up the tab. We already have a housing affordability crisis which requires either a correction of house prices or substantial wage inflation to fix. Seems to me that global ultra loose monetary policy over the last 10 years has just made the financial sector larger at the expense of the real economy.

I can't think of a single time that Roger Kerr has not been bullish on NZD. His rhetoric doesn't change in good times or bad times. If NZD is lower, it should be higher. If NZD is higher it is justified. It's the only tune he knows.

JLM provides the reason above, which can be the only reason he can ignore 50 years of empirical research by the likes of Dornbusch and Mundell

Perhaps this interest should be declared, if it exists, at the foot of his articles- which are presented as objective commentary.

I thought he was just stubborn and/or hopeless,he has been arguing for a stronger Kiwi unwaveringly since I have been reading this site. No one in the industry has such a one-dimensional view, nor could afford to be so wrong for so long. It would explain it.

in 2010-2015 era when kiwi dollar was high, we did very well. Jawboning only works to temporarily depress the kiwi and it will go up and down within a range while jawboning is switched on and off, only to shoot up like a rocket instead of allowing the natural process of its own gradual increase. if inflation is targeted at 1-3% and interest rate is at near zero, is that not like we are asking for stagflation? how stupid. let the dollar "truly float" to our benefit without artificial/verbal interference.