Prime Minister John Key has acknowledged the high currency is tough for exporters, but said intervention by the Reserve Bank was unlikely to be successful because it had not worked overseas and the New Zealand economy continued to be seen as more attractive than the US economy.
He said he did not want to risk taxpayers' money on intervention when there was no certainty of success.
Markets continued to re-rate the US economy, making New Zealand relatively more attractive, he said.
Speaking on TV3's Firstline this morning, Key said any decision on intervention was ultimately a matter for the Reserve Bank.
“But I think you need to appreciate that what’s happening here is a re-rating of the US economy and the various instruments that reflect the health and well-being of the US economy," Key said.
"Essentially the financial markets are saying that, on a relative basis, New Zealand is a better bet than the United States at the moment. That reflects their very sluggish growth, their very high levels of unemployment and of course the massive debt that they have," he said.
"So on the backdrop of that, if the Reserve Bank was to intervene, you’d have to say up until this point anyway at least, that would have been very unsuccessful, and [there] may not be a lot of reasons to believe it would be successful in the future."
"So while we appreciate all the things exporters are going through, the pressures that the high exchange rate puts on them, I think it’s a matter of making sure that we don’t just waste taxpayers money by going out there and punting on the exchange rate and getting it wrong," Key said.
"The reality is if you look around the world at countries that have invoked heavy intervention programmes, they’ve been spectacularly unsuccessful," he said.
'Higher NZ$ can't be ruled out'
Meanwhile, a higher New Zealand dollar against the US$ could not be ruled out as ratings agencies considered downgrading the US government's AAA credit rating and as markets negatively re-rated US assets.
"When I spent my time in the financial markets, we always used to say: buy the rumour, sell the fact," Key said on Firstline.
"You’ve had a lot of rumours about how weak things are and whether a deal would get done in the United States. Now we’re at the point where arguably one has been signed up, and so you may find that the markets actually take it much more in their stride," Key said.
"I think the bigger issue for the US, having been up there recently, it’s one thing to get a deal for President Obama and there’s obviously been a lot of pressure on the Congress and the Senate to approve that lift in the debt ceiling. But what it shows you actually is you’ve got a US economy that’s drowning under an enormous amount of debt – US$14.3 trillion – and a massive budget [deficit]," he said.
"If we contrast that with what’s happening in New Zealand, as a government we’ve worked very hard actually to get back into surplus, which we will do by no later than another two or three years, we’ve tried to control our debt – again, we’re at at third probably of the levels, in terms as a percentage of GDP, that the US is. I think we’ve done a better job of getting our economy more competitive. It just shows you the dangers of poor economic management."
What Key does support
In June this year, Key told journalists his opposition to currency intervention did not go as far as opposing current Reserve Bank policy, which stipulates the central bank can intervene if it thinks that intervention would take the top or bottom of an exchange rate cycle.
Asked on June 8 whether he thought the Reserve Bank’s previous interventions had been unsuccessful, Key replied:
“That’s a matter for the Reserve Bank, you’ll need to talk to them. But if you look at the historical position of banks that have intervened in currency markets, from Japan down, it has been highly unsuccessful.”
Asked whether the Reserve Bank Act should therefore be changed to prohibit intervention, Key said he was “comfortable with the rules that they have in place".
"It’s at their discretion, they have a set of criteria they have to meet, that’s for the Reserve Bank Governor (Alan Bollard), I’m comfortable with that," Key said.
“But my overall view is if anyone believes we can seriously alter the direction of an exchange rate simply by intervention then in my view they’re misguided.”
"I think in terms of their (Reserve Bank) guidelines they’re really somewhat different. Their guidelines are in relation to taking the tops off what they see as extreme position, or in the cases of stability where there may be a case for intervention," Key said.
"But in terms of changing the overall direction, I don’t think it’s likely to be successful.”
(Updates with further comments from Key, link to June 8 story of Key supporting current Reserve Bank policy)