Finance Minister English on why the govt won't change NZ exchange rate policy; Says others' unorthodox policies carry large risks, create imbalances

Finance Minister English on why the govt won't change NZ exchange rate policy; Says others' unorthodox policies carry large risks, create imbalances

By Alex Tarrant

Any attempt to influence the level of the New Zealand dollar with a different monetary or exchange rate policy comes with the risk of large costs, Finance Minister Bill English says.

New Zealand had been down that path before, and it did not work.

So for the last 25 years the government had maintained a policy of a floating exchange rate, while giving the Reserve Bank the capacity to intervene in extreme circumstances, English said in Question Time on Thursday.

There was no intention to change that policy, and Opposition members calling for changes had not yet produced a viable alternative for managing the exchange rate, English said.

Meanwhile, the fact major global central banks were printing new money - quantitative easing - to try and kick start their economies signalled they were in deep distress, and it was not a path New Zealand should follow.

It was highly arguable whether more unconventional policies like quantitative easing, capital controls or currency pegging enacted in (respectively) Japan, Brazil, and Switzerland were making any headway, given the large risks they created, English said.

As a continued upward trend in the New Zealand dollar would hurt the export sector, and it was possible this could make it "splutter and stutter and probably stop," English said the government was focussed on policies to make New Zealand exporters more competitive to help them deal with a high currency.

'Export sector resilient'

Labour Party finance spokesman David Parker questioned English about the persistently high New Zealand dollar, which had sat above 70 on the Trade Weighted Index - a basket of currencies of New Zealand's major trading partners - right through 2012.

Parker asked English whether he agreed with a statement the Prime Minister made in January 2012 that: “We are concerned at the level of the exchange rate because we think that above $0.75 [U.S.] it’s very difficult for our export sector.”?

English agreed with the PM's statement, but said New Zealand's export sector had shown itself to be "very resilient and capable of increasing exports and production when it is backed by stronger policies on competitiveness."

"If the member [Parker] is suggesting that there is some way to choose an exchange rate, then I would be keen to hear from him on that, but of course he needs to keep in mind that even if he could choose the exchange rate, reducing it would reduce the standard of living of all New Zealand households," English said.

Asked whether he agreed with another statement from the Prime Minister, this time in August that continued currency appreciation would make the economy at some point “splutter and stutter and probably stop,” English said that was possible.

"As it has turned out in New Zealand, although we have had a high exchange rate now for a number of years, a relatively high exchange rate, our export sector has continued to expand," English said.

"I think the member is getting at the issue of whether we can choose an exchange rate. It would be nice if we could, but there is no known method for picking the right exchange rate in the first place, and, secondly, there simply are not the tools to hold the exchange rate at whatever desirable level there is," he said.

'Imbalances, signs of distress'

Parker asked English why New Zealand policy makers were not considering alternative methods of monetary or exchange rate policy when major economies around the world were doing just that:

"If China is running a programme of competitive devaluation of its currency, as are the US, the UK, and the EU, if Switzerland is defending a cap on its currency, which is the opposite of what the Minister just said could be achieved, if Singapore is managing within a range, if Brazil and Chile are intervening in capital flows, and if Japan is printing money too to protect its exporters, why should New Zealand exporters be slain and New Zealanders lose their jobs because his Government refuses to move on the primacy given to inflation targeting?" Parker asked.

English said Parker's analysis was wrong. Countries like Singapore, which was managing its exchange rate at a given level had very large foreign exchange reserves for it to be able to do so.

"In the case of Switzerland, they are building up huge imbalances in defending that rate, and one has yet to see whether the experiment is going to work," English said.

"In the case of the UK and the US, they are printing money because they have zero interest rates. The fact that they are printing money is a sign of deep distress in their economies, not success. I would not like to be in that position. It would be bad for New Zealanders, bad for their incomes, and bad for their job prospects," he said.

Responding to a question from NZ First leader Winston Peters asking what the government was doing to to help the economy deal with the high exchange rate, English said it was trying to enact policies to help improve the competitiveness of New Zealand exporters.

"There is no free lunch around the exchange rate. Any attempt to move it comes with large costs and large risks," English said.

"New Zealand has been down that path before. It found that it was not sustainable, and for the last 25 years it has maintained a policy of a floating exchange rate, with the capacity to intervene in extreme circumstances. We do not intend to change that policy, because we have not yet seen from the members a viable alternative way of managing an exchange rate," he said.

English disagreed with Parker that current monetary policy settings were not working.

"The challenge here would be that even if you could change the Reserve Bank of New Zealand Act to tell the Reserve Bank to target the exchange rate, no one knows how it could do that in a sustainable manner that would significantly shift the exchange rate track," he said.

"The fact is if the member [Parker] looks at those countries which say they are doing it, such as Chile, Brazil, and Japan, it is highly arguable whether they are making any headway at all, given the large risks they are taking."

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That does seem like a lot of words from BE when simply saying 'the banks won't let me' would be quicker and use less air.

Different approach to tackle unstable and high NZ$
I made several attempt on with a new idea how to stabilise and lower the NZ$, unfortunately without responses from you guys. Here are the links again. go to 6:30min.
I think interested industrial  parties/ parliamentarians could call for a petition/ initiative interested and in support of such an idea.

I'll take the bait. You've been spruiking gold for a while now; I don't think anyone's interested, and given in my view we need the flexibility to respond with a competitive exchange rate, then it is the last thing I would advocate for NZ to somehow tie itself back to gold when the rest of the world is not. Separately in any case gold makes as much sense to me as tulip bulbs, but that is a side issue. Nothing to stop you investing in gold if you are a fan.
Sorry to not be a fan. Have a good weekend anyway.

 For years, in parliament, in the media and now here, discussions go senseless around the circle – without any new idea, without any positive outcome – sometimes you Kiwis are so strangely traditional.

If it ain't broke, don't fix it.

.... and if they tried to " fix it " , London-to-a-brick , we'd all be broke real soon ....

Exactly GBH......thank god there's some common sense here.....we will have to adjust to this high dollar as we simply don't have the resources to do anything about it and we would go broke fairly damn quickly.  Typical Labour BS once again......! 
All this printing in the USA is beneficial to the pegs their currency to the level they want it at. Countries like Brazil are complaining like heck and have placed tariifs on some of the imports from the US and the USA isn't liking it.

Hello notaneconomist : In Gummie's utopic vision ,  there'd be no pegged currencies in the world , absolutely none . The Euro would be abolished , the reminmbi floated ......
...... any sovereign nation which wishes to trade would have to operate it's own freely floating currency ....
The Euro and the pegged reminmbi are major factors in the currency wars , and in the GFC ....... could the Germans and the Chinese have continued their mercantilist approach , to delberately running massive trade surpluses ( to the detriment of other nations ) if their currencies were freely tradeable ? ..... I think not ....
..... NZ , sadly , is the innocent victim of other nations' irrational behaviour ...... joining them in their stupidity , just makes no sense at all ....

GBH - Do like Gummies utopic version of no pegged currencies - I have often thought about this concept and how different all economies would be.  There's no free-market with currencies being pegged. It's a shame JK didn't bring this up on his recent trip.

Higher value of dollars = less needed....BUT and this is a big but, it gives us options on input costs, energy costs and generally stable wage costs.
Domestic devaluation as a policy to make us better off......please.....

Stable wages in what jobs as all our manufactuerers cannot compete? We can't all be estate agents and sell houses to each other. We must produce something here and sell it to the rest of the world to earn a living for NZ.
You have to think a little further ahread

I agree with you, but I was merely trying to say that a valuable currency gives you options you wouldn't have otherwise. What we do with it is our choice.
Investment in production and jobs is key.....this is government policy area and a valuable currency makes it easier to accomplish.
As far as over investment in non productive "assets" , a whole other can of worms.....
In my view it's our choice to be poor or better off.....but we must resist those that lead us to believe having more worthless currency will make us better off....bollocks.

C'mon Bill
There is at last report at least USD120,000,000,000 of Chinese money sloshing around the world.
This cash is
1. Ferreted out by individuals against Chinese allowed limits
2. Acknowledged to be firing up residential investment in UK, US Australia
3. Why is New Zealand immune from this "HOT" money?
Tell us ,Bill, that none of this cash is landing in the Auckland property market
Tell us, Bill, that this cash is not preventing NZ citizens from being able to afford their first home in Auckland.
Tell us ,Bill, that our own people are not paying rent to overseas owners who pay little if any tax to our IRD
Tell us , Bill, that you do not really care because you only have an interest at the other end of NZ where you can hide away in your retirement.
Finally tell us, Bill, why you do not try to address this type of problem using the RBNZ because you obviously have absolutely no interest in doing anything yourself.

Basel: It's all too hard. $120 trillion. 10 Years ago that was a lot of money. Now-a-days it has a tranquilising effect. See no evil. Hear no evil. Speak no evil. And do a google and "do no evil". Or do an "Admiral Horatio Lord Nelson" with the blind eye "I dont see a thing". What is your concern?
By not seeing it as a problem, nothing needs to be done. It would help if the RBNZ published on a monthly basis what the source is of the flow of funds into New Zealand, and ensure that those funds are "clean" and have paid tax in the country of origin. One day new zealand will wake up and find it has been competing all along on an uneven playing field, against dirty, corrupt, untaxed money.

Basil, this cash is also keeping our interest rates far lower than they would be otherwise, that is without question. Perhaps you'll like to see the other side of your statement i.e. capital not attracted here, with some fine examples developing in Europe, and in the US a few more years down the track.
Unfortunately, when things aren't as bad for you as others, they are always some consequences that go with that, but I take those any day in comparison. Of course many others are economically naive, and think that they can have the perfect world, even at a time when most of the western world is in huge strife.

Grant A,
If the capital was coming in to invest in NZ 's future, I would not be concerned.
BUT do we need cash to buy up existing assets like
1. Auckland residential property?
2. F&P Appliances?
The answer is NO!
If , for example F&P had had a less difficult exchange rate over a longer period it would not have got itself into the finacial problem that allowed Haier to take its original 20% and would not now be under seige.
Hearing Bollard talking on National Radio this morning I think he is much a cause of the problem because of his lily-livered approach to resetting his rules with both recent NZ Goevernments.

Basil, my point wasn't that some of those things are good, it was that you have to take the bad with the good sometimes - I believe that the economy has been well managed throughout this crisis so far, and if the Govt acted to move against the things you suggest, there would be unwanted consequences, starting with interest rates. And what you accuse Bollard of is hugely researched, and not just a personal opinion, as compared with the many critical voices who do zero research themselves, and can only see what they understand or gets the most media.

Two screaming questions begged to be asked of Billy Bob by an inept opposition.
When Billy Bob says...."In the case of the UK and the US, they are printing money because they have zero interest rates. The fact that they are printing money is a sign of deep distress in their economies, not success. I would not like to be in that position. It would be bad for New Zealanders, bad for their incomes, and bad for their job prospects," he said.
1.The obvious question was,...... and what is our current net migration loss to Aust due to bad incomes and job prospects .
2. Where in this debate was at least a token olive branch thrown out to MFG exp in the way of a FTT...tobin by any other which Billy may have replied..."As I've already said..trying to enact policies to help improve the competitiveness of New Zealand exporters....You lying bugger Billy Bob , your encouraging hedging positions to be taken up by Corporate exporters and sod the rest,, you percieve NZincs entire future rests on the pulling of tits, while you continue to pull ours.
It would be fair to conclude FTT's are out of the question because it is a substantial part of Corporate export business,...for them,counterproductive in coping with the high N.Z. dollar.

You guys need to consider that since the US is QE and the USD is the reserve currency what the Yanks are doing is just a temporary move to improve their relative position, it goes like this everyone holds and trades in USD, we 'own' the it, so if we print move voila we are richer! The problem is that this is only temporary, as it will eventually correct istself as these 'new' dollars flow out of the states the same way the old ones did, sort of like filling a bucket with a slow leak
So all this angst over the USD/NZD rate firsty is based on the now inaccurate world view that the USD is some sort fixed reference and secondly that the answer to the current ecomonic distress is more export lead 'growth' wheras the reality is not every nation can do this at the same time, it would apear that industrialised man is running out of emerging nations to exploit

Of course if our money was just that bit more worthless than before all would be well....What a crock of an idea. A litre of petrol with a 50c dollar anyone?
NZers challenge is use great purchasing power to build ways to earn a living.......any plonker can scrape dirt into a truck and sell it off as our Aussie cousins do, we don't have that luxury. Could go on with long winded discussions on education, focussed taxation, banking reform,  , blablabla.....
Point is a valuable dollar is good for a variety of reasons not the least of which it gives you options.

Good point Splineman, and there are many counterexamples against the pervasive atmosphere of gloom and doom. The from Bill Wadell, a highly regarded industrial consultant who I have a lot of time for. He has recently been in New Zealand where he'd been invited by several companies who are either in the midst of transforming their business to reflect Lean management principles or who have already done so. 
"All five are solid and profitable - four of them largely because of their strong sales in the United States.  Let's put that into perspective.  The port at Auckland is 6,500 miles from the port at Long Beach - just a shade further than Shanghai is from Long Beach.  The average working man in the New Zealand factory I visited makes about $15US an hour.  So these manufacturers pay US-type wages, have China-type logistical disadvantages - and still grow their profits by selling into the United States winning head to head battles with both US and Chinese competitors.
... and they invite me to their country and their factories because they want to get even better."

Read more: 
at Evolving Excellence 

Good read Anarkist...But he qualifies the statement further..

But just the same, they only succeed because their American competitors are mismanaged; and I am a bit embarrassed and frustrated that manufacturers in my own country allow this to happen.




I am here simply because their US competitors haven't called me - or apparently anyone else like me.  I can envision their competition - offering excessive lead times (because that is just the way it has to be in their industry - lean doesn't apply to them because they aren't like Toyota) - and marginal quality (because there is a limit to how good quality can be before it is prohibitively expensive) - relentlessly beating on their direct labor (because it is the only way they can compete with China) - and griping long and loud about taxes, the government and everyone else. 


Effectively,  if the U.S. end were to Smarten up and lean down , it might become another story , as he goes on to say in regard to U.S. imports here.....

 I should like to know if he holds any conflict in thoughts on protectionism, or just perhaphs if he foresees  levels of it developing for various reasons.

 With the U.S. dollar economy being now bigger than the U.S. economy in itself  the likeleyhood of large scale protectionism seems remote more so every day now.

 Which is why I think it will continue to be the stumbling block for America's internal economy.....They are way to far into Global trade to get out....on virtually any level.   

hey Christov,
I don't think theres any danger of American companies will smarten up or lean down, because their chief hurdle is their corporate culture and general attitude to their workers.
Bill Waddell states that the chief problems for U.S. corporates treat inventory as an asset and labour as variable costs, whilst management are a fixed cost. It allows them to massage their profitability without even need to hide inventory expenses. Treating labour as a variable cost undervalues the knowlege and skill capital of a skilled workforce, which ensures that they will be the first casualty in a downturn in the company's fortunes. I guess if company's would honestly value their worker's skill and knowledge, then crackpot economic theories like marginal productivity would no longer be able to be used to provide a veneer of intellectual legitamacy for the exploitation of workers. 
In terms of the free trade/protectionism debate he considers economists of both persuasions to be delusional, because due to their anti-worker world view, they overlook the truly fundamental commerical realities. Inventory in particular. Its far better too pay workers in your own country fractionally more, than to have huge amounts of capital idle, since its all sunk into inventory, because you had to make a massive batch order from a Chinese supplier in order for their low unit prices to be economic.
"The economists - both the die hard free trade advocates and the ones staunchly in favor of government control and protectionism are all dead wrong (good luck getting any of them to realize that).  The protectionists are wrong because their whole premise is built on ignoring the concept of value... 
The free traders are wrong because they are as oblivious to economic reality as their close cousins on Wall Street and in the corporate accounting offices.  All of them have a simple minded fixation on labor cost that no amount of pompous, multi-syllabic driveling can make sound intelligent any longer..."

Read more: 

A valuable dollar is good Splineman- BUT if we are all " better off " as BE tells us simply because we are in fact borrowing to pay for consumption, then the dollar is overvalued.
No one I am aware of has borrowed their way to prosperity.
No one including Madoff and Ponzi has ever survived by borrowing to pay the interest on their debts.
Our dollar should be at a level where we run can current account surpluses in the long run.
This would and will be very painful - but it will happen. The only question is when. Something  pollies would rather put off for another day.

Neither has anyone devalued their way to prosperity JB, but this "value of currency" thing is a mugs game. We can't win.
We need to foster investment in production and jobs.....a valuable dollar helps this.
Top quality production equipment available from Europe has never been cheaper. 
Our policy makers should be ashamed of themselves for allowing so much wealth and borrowing to be sat around in unproductive houses.....but that's another discussion.
A high, relatively, dollar gives you options.

Nobody would suggest borrowing your way to prosperity. However China among others has deliberately held their currency to a lower than natural level to gain the advantage over others.
What can be done is to set all of the controllable things to push the currency the way we need it to that will hold up our export advantage. This government does not even realise that a propfitable export industry will pay more tax and make our welfare costs more easily met.
If petrol cost determines your only measure of how you are going then we deserve everything we get. If we want to go back to the "bad old days"' then we can just wait and do nothing and have it all imposed on us.
Or we can try and do something about it.

I would, borrow where it is a productive borrowing in order to make a profit. So a business person setting up a business and getting capital to startup, well thats how many do it.
Im sure the Govn realises full well the impact of a high NZD, the Q is can anything be safely and effectively done to bring it down a bit without crashing it all the way.
What I have not seen yet is why they seem so reluctant to even try a bit....unless they think its better this way.
Of course it could be the usual political dogma.
and bear in mind we are borrowing at 5~6%, which is fairly high.

To even begin suggesting options that can be considered you need data. You need to know who is buying the NZD

The RBA publishes the data for Australia.
Yesterday the Phillipines Government popped up as a new and recent heavy buyer.

Sufficient to say the RBNZ knows who. Does it publish the information? Does buying by sovereign countries account for the BULK of the money flowing into NZ? How much of it is non-government buying? To solve any problem you need to examine the inputs in order to assess the outputs.

There are 64 Sovereign Countries currently holding stocks of AUD / NZD iconoklast , this is the problem for the RBA.......ours is likely to be largely China and could become more so as they quit their positions on Yen and USD in  the events unwinding now.

For the past 5 years the US has been running an annual trade deficit of $200 bn with China while it also runs an annual trade deficit of $400 bn with oil supplying countries (mostly middle east) yet in those 5 years I have never seen any comment about where thos petro-dollars are going, or hiding, yet we hear a lot about the $3 trillion US treasuries China is holding. Nothing about the other. Any clues?

Doesn't matter if capital equipment is cheaper, no-one will invest with such a poor expectation of returns. You need increased profit to have confidence in re-investing.
Many companies I know have avoided capital investment and R&D in all but essential areas because there is no positive outlook for sales - some of these are hi-tech companies as well.
Yes there are many other policies which need looking at - such as 12 month depreciation of  capital equipment for manufacturers - I am sure this would give some incentive.

English keeps saying there is no way of picking the right exchange rate. Fair value is where you have a current account in balance. You might occasionally say we need to build new significant investment options, and tolerate a 1-2% deficit to do so. You might sometimes say that we need to pay off some of the old debt, and start to own a bit more of ourselves, and so aim at a 1-2% surplus. But in balance is a pretty good start. And the IMF suggest that with likely supply and demand elasticities, that would take a 20% devaluation. So that's the right rate, Bill.
He also says the risks of managing the exchange rate; which pleasingly he has finally admitted can be addressed, are very large. The cost of not doing so is currently $10 billion per annum, or $200 million a week, or $30 million every day. Those risks must be massive indeed to trump those costs; he therefore should be able to explain what they are, what would cause them, and put a relative cost on them, so we can judge the relative costs and risks. 
The real reason of course is that he is worse than the average Argentinian populist (with apologies to any Argentinians around), and does not want to explain to anyone that we are really going massively into debt to give them cheaper petrol; and cheaper overseas holidays, than we can actually afford. See the following quote "reducing it would reduce the standard of living of all New Zealand households"
We are borrowing, and selling whatever we can lay our hands on, to pay for these holidays, and he does not appear to be willing to admit it to the people. I should note that given a refocus on domestic production that an exchange rate drop would cause, that in my view living standards would not drop materially at all; but that is a side issue.

In order for me to get a better understanding of this topic - could all named persons above - including Billy - list their personal export performance - expressed in 2012 $ values.
Since 1977 I have personally exported three million worth of product. This peaked in 2002 - one man band assisted by supurb help in the office - one third of a million.
As the exchange rate shot up and my customers moved to Portugal - I often wandered how F & P were getting on. MMMMMMMMMMMMMMMM
$3,000,000 - beat that. Come on! Dare ya!

I exported myself, and since I am invaluable...

also could you please clarify: - is that 3 million in adjusted dollars or just a total over the 35 years?

And how much rounding has gone into that figure? Could you be a little more exact please?


Just a bit off topic but .....
I believe I  have a worthwhile suggestion as regards the problem of insufficient funds to pay for true universal Healthcare without destroying the county's economy ...
A new Government Insurance Company [ The G I O ?] could be set up incorporating the currect ACC infrastructure - or at least that part which is deemed appropriate , and this new entity would also be responsible for providing COMPULSORY Third Party Vehicle insurance along with acting as specific provider of both Central Government [ where required] Local Body and School /University  insurances, EG:  Valid levels of  Earthquake  Fire, and General property  Insurance ] plus other "High Value" [ Professional Indemnity for defined groups for example ]  insurance coverage
All of which would be in addition to a National Health Insurance Scheme  which would be additionally funded by direct deductions through a small % of PAYE.[ 0.25%....???]
The nett result of the combined  handling of  such large levels of total insurance business should easliy make the organisation capable of obtaining attractive Re- insurance arrangements in the same way that  the current crop of rapacious private sector insurance companies.
 The overall reason for its existence would of course be quite different from the private insurers in that it would - a bit like Pharmac - be responsible for getting the very best possible deal for NZ as a whole at the same time as addressing the current systems inherent inequities.
This is very much a "concept under development" and I  am by no means certain thathe idea could be made to work but it does seem to offer some potential....? anyone care to comment ???

Tweak only uses orthodox policies which carry large risk and create imbalances...right Tweak?

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