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)
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