By Alex Tarrant
The New Zealand dollar faces a volatile time as quantitative easing programmes run by central banks in the US and Europe devalue the major global currencies, which have so far kept the New Zealand dollar high around 80 US cents, Prime Minister John Key says.
It was the government's view that it could not alter the exchange rate, which in a freely floating market was subject to the market's interpretation, he said.
Speaking to media in Wellington on Wednesday afternoon, Key said a New Zealand dollar around 80 US cents was considered by the government as putting pressure on Kiwi exporters. On the other hand, it meant imports were cheaper.
Meanwhile, there were unlikely to be any significant changes to the new Policy Targets Agreement incoming Reserve Bank Governor Graeme Wheeler who is set to sign with the Finance Minister before taking over at the Bank on September 26, he said.
Volatile outlook for NZ$
There were lots of factors moving the New Zealand dollar around at the moment, Key said.
"The reality is the New Zealand exchange rate's quite high at the moment, and it's been subject to significant speculation [about where it's headed]," he said.
"It's also true that you're seeing quite a lot of weakness in the US currency and the euro as a result of their quantitative easing programmes. So it is probably going to be quite a volatile time for the New Zealand dollar."
Markets are currently waiting to see whether the US Federal Reserve will engage in a third round of quantitative easing (QE) - where a central bank creates new money to buy government or private sector bonds in an attempt to inject new money into the economy - while the Bank of England just extended its QE programme and the European Central Bank has what many consider as a QE programme through its long-term refinancing operations.
Asked whether the government viewed the currency as overvalued, Key replied:
"Our view has been that at above 80 cents against the US it puts pressure on our exporters. There's a counter to that - it obviously makes imported goods cheaper, and the imported components of exported goods cheaper. But it certainly puts pressure on some exporters. There's no question about that."
While the government could directly control things like public spending and the way laws like the Resource Management Act were applied, "what we can't do is alter the exchange rate," Key said.
"That's really something which, in a freely floating market is subject to the market's interpretation, and subject to very extreme conditions, it's not the government's view that we should intervene," he said.
Asked whether there might be more reference to the currency in the new Policy Targets Agreement Wheeler would sign with the Minister of Finance before taking over at the Bank on September 26, Key said Finance Minister Bill English had indicated to him that there were "unlikely to be significant changes" in the new PTA.
Meanwhile, Key said it was not his job to comment on whether the government considered the Official Cash Rate was at an appropriate level currently relative to projections of where the economy was headed.
"New Zealand has an OCR which is higher than in other countries, so that's been noted by both S&P and others as an advantage for New Zealand because it just indicates we've got room to move if we needed to, just like the health of our general [public] debt levels is low.," he said.
"They're just known advantages to New Zealand. But whether [the OCR] should go up or down or what it should do, that's a matter for the Reserve Bank Governor."