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."