By Alex Tarrant
The Reserve Bank will be watching its Swiss counterpart’s “bold experiment” of trying to control the Swiss Franc against the Euro, and is concerned about the monetary and currency policies being enacted by the world's larger central banks, as the New Zealand dollar remains overvalued compared to long-term fundamentals.
Governor Alan Bollard said the New Zealand dollar was persistently high and being buffeted by what was happening on global financial markets.
The level of the over-valued currency was a drag for New Zealand’s tradable sector, Bollard said. A silver lining was import costs were cheaper, which helped keep inflation under control, although this was not how the Reserve Bank would prefer to see price stability.
“We continue to be in the situation where the exchange rate in New Zealand is quite a difficult feature. It’s, we now believe, significantly penalising some activity in the traded sector, hurting some New Zealand firms, and that’s a medium-term affect, not a short-term affect,” Bollard told media at a press conference after releasing the September quarter Monetary Policy Statemet.
Those exporters who were able to take advantage of importing inputs in US dollars, while exporting in Australian dollars could do well out of the exchange rate’s position, although that was a small part of the traded sector.
“Basically at the minute, as we’ve really seen over the last six months or so, the New Zealand dollar is just one of those currencies where the levels are being set by trade that’s basically related to what’s been going on in the major economies, and we suspect that will continue for some time,” Bollard said.
“You will see a number of other small, open economies with their own exchange rates under some pressure here. You’ll be observing that a number of them have been looking at other tools – most recently of course the Swiss National Bank looking at trying to peg the Swiss franc – we will watch that with considerable interest as to how successful that might be,” he said.
The Swiss move was “a bold experiment," he said.
Bollard said the Reserve Bank was concerned about the broader monetary policy and currency arrangements of the world’s larger central banks. It had observed a number of smaller economies were under exchange rate pressure and were looking at ways to mitigate that, like the Swiss.
“Those can have some ongoing competitive effects, but generally speaking, those smaller economies aren’t the ones that are starting those – their whole transaction basis is much smaller and they’re not likely to have that competitive devaluation impact,” Bollard said.
“What we’ve seen more recently we don’t think changes things. It’s always a risk, during a period of real international economic problems like this, that we shouldn’t start to see competitive beggar-thy-neighbour type policies, and that is something of course that Europe is struggling with right at the moment,” he said.
See the full news conference video below:
16 Comments
This article has a graph of the losses the Swiss national bank had already made before they decided on the new policy peg.
http://stefanmikarlsson.blogspot.com/2011/08/swiss-currency-interventio…
I hope one of the things the reserve bank watchs is the swiss balance sheet.
Well the light blue line (which dips downward) is their equity and the dark blue is the foreign currency - so their balance sheet had already eroded from $65B to under $30B and that's before they threatened to let losse again.
AKA. they have spent over half their balance sheet and have managed to creep their exchange rate back to the level at May.
If their currency continues it's strengthening path over the next few months they are going to book massive losses. It's the bank versus the market but the market has more money than the bank.
We are not the Swiss Frank. We are not a place of refuge for euro wealthy and euro savers pissed off with the failure of the euro and the euro nation banks and too aware of the market corruption and fraud that comes with gold. They are not rushing to buy Kiwi$.
So any hint that the RBNZ might follow the Swiss lead is pure crap.
As for Bollard's jawboning about the Kiwi$ being too high....humbug.
If it drops...we import inflation care of Bernanke's madness..ditto the BoE and ECB and BOJ.
Imported inflation will have to mean either a huge bloody downturn in already deadly quiet activity and a shedload of social unrest and potential tossing out of National.....! or Bollard would have to hike the ocr to drive the dollar back up...not to attack the inflation on a micro level(ie killing off already sick activity) but to make the Kiwi$ attractive..to push up the fx value to make the import costs cheaper.
So all this fluff from Bollard is so much humbug. The dollar will stay at a level that takes the sting out of the major import costs.....fuel.
Good golly Mr Wolly, the nature of your comments here are such a surprise, not. Read on, by golly:
http://www.realeconomy.co.nz/206-rbnz_lessons_from_the_swiss.aspx
"NZMEA Chief Executive John Walley says, “This is the sort of approach New Zealand needs to take. It does not require a currency peg as the Swiss are using, any number of approaches can be adopted, but whatever the method chosen the same overt commitment to deal with an overvalued currency needs to be demonstrated to get the right reaction from currency markets.”
“As a comparison the RBNZ’s largely hands off approach encourages the currency markets to play that predictability without fears of any sustained intervention.”
“New Zealand must look to advance its own interests as the rest of the developed world are doing – this requires action from the Government and the RBNZ. More of the same don’t scare the horses approach will see an ever declining tradable sector and worsening debt problems as a result.”
http://www.realeconomy.co.nz/204-swiss_intervene_to_stop_curren.aspx
"The last paragraph shows the Swiss National Bank are prepared to accept the risks associated with controlling their currency as they see the benefits of maintaining a competitive export sector. New Zealand needs to look to make a similar commitment."
http://www.realeconomy.co.nz/196-rebalance_wont_happen_while_ex.aspx
"Capital controls rather than the exchange rate must be used to restrain inflation say the New Zealand Manufacturers and Exporters Association (NZMEA). There are a number of options available to the Reserve Bank to restrict inflationary pressures through capital controls. These measures do not reduce returns and investment in the tradable sector."
The capital controls link goes to John W's blog to an article called, 'Price or Volume'. Quoting from there:
"The CFR would be more effective if it specified a percentage of funding that must come from domestic sources."
So many ratios to play with, enjoy yourself Wolly.
Cheers, Les.
Les: Mate you are so right about capital controls - the LTV ratio maximum on real estate for example would have a huge impact, force people to save for a deposit, instead of constant over-leveraging. Would build the savings rate of NZ up. Also .. it doesn't tax anyone. This is the best way forward IMHO .. why has the govt not considered it? I was interested in those comments about Texas only having a 25% increase in real estate prices from 2000-2006 - sounds about in line with normal inflation. Also - South Korea did this too ... and look at how wealthy they have become...
Yes complete piffle.......he's now taken to involuntary dribbling....for what purpose is unknown but safe to say this guy struggles for a basic plan .... and definately needs to stop reading the funnies in the Economist Monthly as I think he thinks they are editorials.
Rocket flavored Swiss Cheese anyone...?
The peg is basicaly a scam against the market.... sudenly overnight the exchange leaps several pips away from the prior closing price traping all those in the wrong side of the trade only to milk them dry by moving the rollover to extreme pain forcing them to make a loss or stay in the trade till they lose their equity. If Mr Bollard is "thinking" of it only shows that he is no better than a canned delincuent.
UBS – thousand’s should be arrested, because of doggy business practices - incl. CEO's
gangs of hoodlums : http://www.youtube.com/watch?v=ufQWd23R-dA
In the case of the Swiss peg I can see a fundamental reason, it has to do with the European mortgage market wich involved high risk for the Swiss financial system, being the Swiss banks one of the biggest mortgage lenders in Europe. When the exchange rate against the Euro became 33% dearer delinquency was arround the corner and became a true threat to the Swiss economy. But in the case of New Zealand it would be nothing but "keep the party going". I would like to hear what Australians think about becoming a captive market of New Zealand.
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