Prime Minister John Key said he had talked to Reserve Bank governor Alan Bollard about the high New Zealand dollar last week, but stressed the independence of the central bank in its currency policy.
Key said he had spoken to Bollard about the currency as late as last week.
"I meet him reasonably regularly, and so there’s nothing particularly new about that. It’s for him to determine what he thinks is the right course of action," Key told journalists this morning in Wellington.
He said he tended to ring Bollard rather than the other way around.
Key said he did not think the independence of the Reserve Bank had been compromised by the government regularly saying it would not intervene in currency markets to try and push the New Zealand dollar down.
QE2 - 'No great mystery'
Key said the "truth of it" was the government knew what was driving the New Zealand dollar higher against the US dollar.
"There is no great mystery here," he said.
"It is the weakness of the US economy and the desire to see the US dollar depreciate, and that is quite clear by the actions taken by the Federal Reserve in the US [by launching a second round of quantitative easing].
"The purpose of quantitative easing is to increase the money supply in the United States and to depreciaste the US dollar. There’s no ambiguity here, we all understand what’s going on," he said.
"The question is what could New Zealand do to stop that appreciation [of the New Zealand dollar]? The answer [from Labour] is, well take a completely different approach to the one we’ve taken for the last two decades and more, which is start having a controlled exchange rate.
"My only point would be, yes you can effectively do that, but it’s not at no cost."
Key said imbalances would show up somewhere else in the economy, such as greater pressure on interest rates, higher inflation, or less access to capital.
"From New Zealand’s point of view we’ve always had these currency swings. They’re very uncomfortable and I recognise the damage they do to exporters – particularly those who are non-commodity linked. But basically there are limited things we can do," he said.
"If we were to intervene, as the Australians and others have done – the Swiss, the Japanese – then at the moment New Zealand would be significantly underwater."
Goff: Army of bureaucrats has had no answer for high NZ$
Labour leader Phil Goff earlier reiterated his party’s proposals on monetary policy, saying it should not just be reliant on the current objectives and the current tools.
"Clearly the [NZ] dollar is at such a high level that it’s helping to destroy the manufacturing industry in this country at the moment," Goff said.
"We have to take that seriously and I would expect the government, with its army of bureaucrats, to have some answers, so far we’ve seen none," he said.
Key later retorted that Goff was talking about the same 'army of bureaucrats' that worked for Labour when it was in power.
Goff said there were limits to the RBNZ’s powers, “but they do have powers and they can choose to exercise them”. He noted the central bank had the power of judgement as to when and how it intervened in the currency markets.
"The government clearly has to have a broader strategy to stop the manufacturing export industry in this country being destroyed by a high dollar," he said.
Asked whether the current case was one of the US dollar falling, rather than the Kiwi dollar being high, Goff said it was, “in this instance”.
“But there are many other instances where the New Zealand dollar has been above the appropriate level, and that’s been because in the past of high interest rates in New Zealand," he said. "That’s why the broader monetary policy needs to change.
"But what you have to focus on is that if the dairy industry is doing really well, and that pushes the price of the [NZ] dollar up, you can’t afford to kill your cost effective manufacturing export businesses and that’s happening at the moment."
RBNZ's independence not threatened, Key says
Key was asked whether the independence of the Reserve Bank was being threatened, given the government's repeated comments about not intervening.
"He [RBNZ governor Alan Bollard] is independent, he can do whatever he likes," Key said.
He said he would not expect Bollard to consult him first if the RBNZ were to intervene in the currency market, although Bollard was free to do.
"I suspect he's probably fallen into the same view that I have - that it [currency intervention] is not working for anybody else at the moment," Key said.
"It may one day, when the position ultimately turns and the sentiment's a little bit different, it might work. At the margins, intervention does [work], but it's never been a policy that's never been very successful.
"If you don't believe me, go and ask the European Central Bank, the Bank of Japan, the Reserve Bank of Australia, the Central Bank of Switzerland, and any other central bank you want to ask. It does not work as a policy. It's a nice idea and it makes people feel good, but it does not work."
‘Unlike Australia, we have a big market called Australia very close to us’
Key said there were a still a lot of options for dealing with the high currency.
“Firstly if you look at the terms of trade for New Zealand, they’ve been rapidly improving,” he said.
“Secondly, unlike Australia, we actually have a big market very close to us, called Australia, that actually delivers a very efficient and competitive exchange rate.
"A big part of our exports are into Australia and we’ve had a significant depreciation against the Australian dollar in the last few years, so it’s not to say we are without options. We have options, but they’re not free options.
Key said the high exchange rate also brought benefits to the economy.
"For the most part you’ve also got to acknowledge for instance that when we have a high exchange rate, we have lower prices at the [petrol] pump. We have no concerns about imported inflation, we have very little, limited pressure for the Reserve Bank to increase interest rates," he said.
"So yes, there are some impacts on our economy, both positive and negative, but over time we want to build our export markets. We want to diversify from just [having] the agricultural sector as the primary form of export earnings, and tourism, and so we need other companies that are non-commodity related to do that."
(Updates with Key on Australia, on RBNZ independence, Goff's comments, QE2 - No great mystery)
25 Comments
Key: "Let's see and wait" or was it : "Let's wait and see" - anyway - HA - for how much longer PM ????
The catalogue of measures taking by the big economic powers to fight each other has taken unprecedented proportions on many fronts. It is time our PM Key talking about a contingency plan for New Zealand.
As a small, remote nation it means align the basics of life and business towards self- sufficiency and sustainability - urgently.
".... imbalances would show up somewhere else in the economy, such as greater pressure on interest rates, higher inflation, or less access to capital".....and while that would mean a quicker end to the property ponzi bubbles and some serious losses for the banks as the mortgagee listings rocketed to new highs, due to the higher interest rates...it would also bring better returns for savers and bring a faster re balancing of the badly structured ponzi dependent economy.....so errr armmm we think it's best to save the bank profits and leave households seriously unaffordable...and accept the poor export returns for those not selling commodities...and ok maybe that will mean poor tax returns and higher unemployment....so what...the banks are far more important...aren't they?
Of course they are John...without the banks the debt driven economy would shrivel up and so what if the banks are throwing cheap hot credit into the bubbles...that's the recipe for creating activity in the economy that passes for growth but in reality is no such bloody thing. But it will keep the poodle media happy and might mean another three years at the pig trough playing the "let's wait and see" game.
The last thing we expect from govt is anything that will threaten the overlordship of the aussie banks.
..and of course the party leaders - Goff and Key of this country still have time on their hands to play “Kindergarten” in stead of recognising the seriousness of the world’s problems and it's possible severe consequences - and work together.
...and the public is still stupid enough to judge them as usual - with soccer- scores - HA !
Alex - presidents (eg. Bush) are worse then PM’s - they make promises they can fulfil – hmm!
The most important thing is for us to find Osama bin Laden. It is our number one priority and we will not rest until we find him." --Washington, D.C., Sept. 13, 2001
"I don't know where bin Laden is. I have no idea and really don't care. It's not that important. It's not our priority." --Washington, D.C., March 13, 2002
It just shows we cannot trust those people called presidents.
Alex - so maybe we should abandon all other markets and concentrate on this really, really, really, "big market very close to us"?
Do you think that makes sense as a long term economy development strategy?
Do you see any downsides to this kind of strategy, bearing in mind just how really, really, really big that market is?
What kind of questions might you be putting to the PM to improve on your journalism?
Cheers, Les.
Don't worry Les, I wasn't supporting the comment, merely pointing out it seemed a tad silly. I don't think Australia would want to be us just because we're next door to Australia, I think it's very happy being Australia.
Key seems to be getting frustrated by all this currency stuff.
We need to export more, govt wants a greater proportion to be non-commodity it seems, and with more value added. That's not going to happen overnight, and it might be a bit harder developing new and better products to export when R&D spending has been cut.
What questions would you like the PM to be asked?
I'm going to start focussing more on how is the government going to support exporters adding value to their products, and what initiatives there are for more manufactured exports rather than primary?
One thing standing in the way comes in the form of labour costs. Others are scale and access to capital. It's not as easy as saying 'we should export baby formula instead of just milk powder'. If it were that easy, wouldn't we be doing it already?
Cheers
Alex
Pah, am getting too old for this subtle irony lark. But he said and meant it, and it was as you say, silly. But no one questions ....
Key frustrated - who knows, maybe he's just going along with the song sheet, when he well knows how things could be sorted? C'mon, surely he knows given his background? If he wasn't as smart as he was, he'd have ended up at RBNZ? As it was he traded agin, (did he not) and beat em? Errr, who' song sheet?
What gov. say about export more value add - they only say stuff Alex, they have no real effecitive plan. This is the spring board of NZI's recent report, 'A Goal Is Not A Strategy'. ask BH when he's getting Rick B on for a double-shot to discuss. I gave up reminding.
Questions to PM - "Primeminister, is it not the case that we should not be asking how to control our currency, but rather how we should control it's attraction for speculative abuse. (Real brief pause, cough to hold the moment and jump back in, toot-sweet with ...) That being the case Primeminister, should we not remove the yield attraction of our currency by instead of using the OCR as the primary control for inflation, rather we should use prudential ratios, which had they been used before the GCF, as the very best practice the world has to offer, we would not have had the GFC and resulting blight of recesssions that have affected many far and wide?" (Take a puff on your Havana and with left hand grasp your left label and stare menicingly, like you could lead a country to victory against a facist aggessor.) Got m'drift? Then just play with him.
Focusing of gov. supporting exporters - provide a level playing field, forget (what amounts to) centrally planned interventions in the niche/value-add/hi-tech/differentiated product/disaggergated requirements space.
Labour costs - we need a high wage economy to generate earnings, to generate savings, do what I'm saying above and this isn't a problem.
Scale - we have some very good firms that have gone past the BBB ceiling under different policy and opportunity regimes, so do policy that helps crack that barrier for them - see above + the currency problem, which is really down to ..... (Can hear those Merlins roaring now....)
Access to capital - taxation, and get Wyatt Earp in.
Infant formula - you might find that is about coprorate strategy, not capability, that is, Fonterra's purpose (niche objective) was to be world's leading ingredient supplier. Maybe there's an opportunity, let's wait till May?
Cheers, Les.
... and:
“On the grounds that New Zealand is too small to move ‘the market’, our authorities have traditionally opposed intervention notwithstanding the fact that sterilised intervention is a long established concept in finance literature and widely implemented around the world. Of course, it can run into trouble when authorities are trying to maintain an over-valued exchange rate, without adequate foreign currency reserves with which to intervene. But when the intervention is to prevent over-valuation, the only limit is the supply of a central bank’s own currency. This is not a problem for a truly independent central bank that is not facing inflationary pressures. When countries as small as Mauritius are intervening to stabilise their exchange rate and are being complimented on it by the IMF, one wonders why the New Zealand authorities think it is beyond them.”
Really, well I never. I wonder what kind of engineer said that? (BERL)
I guess the problem comes with the the fear of those "inflationary pressures " and having a monetary policy that we know can't deal with them (non-tradeables inflation) very effectively, because if they could we'd not be seeing the degree of currency problem we are, notwithstanding others printing.
So the answer to the question that we should be asking about currency and improving monetary policy effectiveness are very similar, that is, to make the Kiwi less attractive, use supplementary instruments (note plural) to the OCR to help control inflation and make the Kiwi less of a sitting duck!
Put simply, use 'The Ratios' Luke - you know you can - drop the OCR, instead of dropping NZ's pants!
Cheers, Les
Les , Les , Les : Pah you say ! Hey , NZ has been naked , on it's knees , saying to the world " make me squeal 'like a pig " , ever since David Lange said " let's have a cuppa " , and stopped reforming the economy , 25 years ago . ......
....... D'yer hear the banjos getting louder , Les ? Run buddy , run 'like hell . That's Goofy , Klinger & Cunny coming for you ! They will win the 2011 election .............. And pal , NZ will be screwed like never before .
Roger - as I said before, I voted NACT while the last Labour government was in power and was glad to see em' go. Next time I'll be voting for what I see as 'nearly new' Labour and/or NZ First and want to see NACT gone. The main turning point for me has been NACT's reluctance to lead and put that cuppa down, eg. effectively doing squat on the TWG work - they should have grasped the nettle on effective asset/property/land/capital gains taxation and by now corp. PAYE could have been down and assisting in recovery. Then on the opposition benches we have Labour abandoning the concensus on monetary policy - good! So long as they can keep the envy taxes in check I think I'll be happy to give them my vote. By that I mean not be more progressive with PAYE, simply tax the inflationary wealth generation that is being taxed. Even if they bottled on that, and I expect they would, but only sorted monetary policy that would be a good enough.
I expected a lot from NACT but they've failed in my view, mainly in the leadership area; what we've see is pandering to polls as opposed to good quality communication to motivate and lead change. (Look at the things they've bungled.) I've come to realise that while a three year term and MMP is often used as an excuse, both influences can be overcome with good conviction based leadership - and NACT have failed. Sad, but true, and worse, there ain't so much between either side, neither will deal to size of government (effectively); ditch stuff like WFF; curtail a tendency for 'picking winners' and centrally planning where free-market approaches are working, in our context.
Dismal, but we got what we got.
Cheers, Les.
The problem is dropping the OCR encourages cheap property speculation.....either by domestic PIs or foreign ones, we have seen that behaviour, look at the mess the USA is in....so its a balancing act. Now reading some stuff on why Texas has mostly avoided the property bubble it seems its very strict lending regulation has played a big part.....the problem is you cant just simply change the rules massively over-night.....this needs to be a multi-year if not multi-govn target....
So, its too late Les....a decade of labour doing bugger all has stuffed us....and indeed if it wasnt for the current crisises I think National would have carried on the same way.
On a brighter note I suspect the OCR will drop next year, but as the saying goes be careful what you wish for....it will be because we have a double dip and a real depression....
regards
Steven - the thought is, drop the OCR and use 'The Ratios'. The fact that RB would state that a change of approach is coming, based on ratios, would be enough to take some pressure off. So am not suggesting drop OCR and ignore the need to control inflation, I'm suggesting using ratios will help with the currency issue and deal with what the OCR can't, very effectively, that is, non-tradeables inflation.
Cheers, Les.
Inflation? not my worry....its deflation and the collpase of housing value is.....the real danger is then the collapse of the consumer part of GDP, with that collapse also comes collapse in tax revenue....this is whats killing the US states....so we would have to borrow more or raise taxes.....bet either of those isnt what you would want to see.
I think I commented elsewhere, Texas never had a huge property boom [probably] principally because it looks like it had very tough regulation on housing loans....(Nevada for instance didnt but had the same build anywhere attitude, so its unlikely HP's for ever rant on over land regulation is very significant....) So in principle introducing similar tough regulation and ratios and then be able to drop the OCR to compensate / balance might be a goer.....but the housing market would need years to adjust something that is of no consequence to exporters pain right now......
In terms of non-tradable, energy is effectively a cost manufacturers suffer.....higher NZD, cheaper oil....I can understand what you are saying and generally I agree, my worry is the Govn does more damage to our economy than it fixes/improves....
The NZ OCR is actually quite low.....the USA OCR is 0.25%? they can go no lower so are printing....for me QE/printing looks disasterous....
Oh and lobby over not getting stitched up by these free trade agreements the US wants.....there are enough examples out there clearly showing the US shafting its fta partners....patents is one, that would stuff your ppl......lets not go there...
regards
Steven - regarding lag and impact of the ratio kind of change we are discussing, if RB were to say, we are dropping OCR by X and FROM NOW ON will now also utilise P, Q, and R ratios as supplementary instruments to maintain the present monetary conditions for the internal economy, what effect do you think that would have on NZD and the source of non-tradeables inflation - the property market, both in terms of levels and speed? Where, P, Q and R are say:
- Specify and vary LVRs, and per asset class.
- Re-rate and vary risk-weightings/capital buffers, again per asset class.
- Along with varying CFR, modify CFR's numerator to also specify and vary the mix of market and non-market (domestic) funding, while also weighting non-market funding by proportion against time durations, which may be greater than 12 months.
Sorry it sounds like an exam question with all the P, Q, R stuff, however penny for your thoughts?
Plus, any thoughts on my BERL/Singapore follow-on question.
Cheers, Les.
Re. my BERL quote above, does anyone know why preventing under-valuation (requires reserves) is more important for Singapore than NZ? Noting that we primarily have an over-valuation problem - which requires the will to act and actually control inflation, even if it does mean going against the status quo.
Cheers, Les.
One of the best way to help exporters is to keep the OCR (and therefore inflationary pressures) down by reducing credit lending to property investors and government which ultimately crowds out lending to businesses. A high exchange rate and low long term borrowing cost would be the perfect opportunity for NZ businesses who take a long term view to expand offshore.
You should ask John Key, why wait until Budget 2011 before introducing new policies to improve investments & savings, especially when enthusiasm for property is waning and home affordability continues to improve, which would cost him less policital capital to introduce such policies. This is of course assuming that the new policies would target property investments which has caused social implications (home affordability & ownership), is an unproductive asset , increased the debt of the nation (also the cost of servicing the debt) and is a key driver of inflation? Now is the best time to introduce new savings policies especially when NZers are now supposedly saving more than ever and we should encourage this behaviour.
Would he consider floating SOEs, particularly power companies thereby expanding their capital base (i.e. government does not sell its current capital investment in the company but selling part of the ownership) allowing them to rapidly expand offshore, invest in green technology, provide NZ with greater investment options and create 'export' income which they are already doing to a small extend successfully.
Another way to help exporters is for central & local government to actively work with export companies and that sometimes means providing subsidises for NZ-own companies making significant investments in NZ to reduce their start-up risks (e.g. building manufacturing plants or research labs). This should be made on a case-by-case basis. These subsidies can be in the form of tax benefits during the start-up phase and is really a win-win situation as the subsidies are temporary but provide long term benefits to the economy (it's too costly for a company to later decide to relocate or close a significant investment offshore). Helping businesses establish themselves in NZ and creating jobs is sure better than building stadiums and offering free swimming pools.
SOE's save us money and are solid businesses....every other ex-Govn institution that has been sold off has been gutted of value and crippled with debt, this is why the NZX looks so pathetic, all that would do would fll banksters pockets and institutions would then insists on un-realistic short term rewards beofre dumping them on mom and pops.....So floating the SOE's would just destroy their and our (the voter) value.....in terms of Green technologies because they dont worry about short term suicidal profits it looks like they are in fact doing considerable green work.....wind, hydro etc.....Jerry Moron Brownlee wanted gas fired plants, no one in the SOE's do......because its not a secure supply in actual supply as well as cost....these appear to be rational decisions where the Board is allowed to think and plan.
Actively looking for exporters....this means picking winners.....or maybe that should be whinners.....the UK for one did this in the 1970s...."British Leyland"....it was a disaster....we saw it again with the US Govn supporting its crappy car industry......with huge bailouts.....
Now the idea of start-up tax breaks has merit and should be considered IMHO....Ive thought of it and frankly Ive been put off....making it really easy and almost tax free in the first 2 or 3 years subject to some sort of limitations looks a possibility.
regards
And more debt monetisation goings on here in NZ on the 5th November;
RBNZ purchases another $100 million 15/03/2019, 5% notes directly from NZ Treasury. Bank demand for circulating notes must be explosive (doubtful) or the settlement amount due to the government is being electronically added to the RBNZ's liability ledger. Who knows? Maybe somebody at the RBNZ can state which assets are being sold, if that is the case, to finance this latest round of asset accumulation?
Unless, of course, the RBNZ is buying back outstanding, potential loss making NZD intervention sales. See graph on left.
Nonetheless, new government debt is being issued against cash delivered by the central bank to facilitate state transfer payments and hence bank deposit growth mortgaged against future taxes.
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