By Alex Tarrant
The Reserve Bank cannot fundamentally change the direction of New Zealand’s exchange rate and there were very limited circumstances when it would intervene in the currency markets, RBNZ Governor Alan Bollard says.
The New Zealand dollar recently hit a record post-float high of 82.6 US cents, prompting some to ask if the central bank should intervene in the currency markets to sell New Zealand dollars in an effort to drive the currency down.
Bollard told a news conference after releasing the bank's June quarter Monetary Policy Statement the RBNZ had been watching other countries intervene in currency markets with little success, although it was keeping an eye on innovative approaches to currency controls.
Prime Minister John Key waded into the debate yesterday, saying he did not think currency intervention policies worked, although he was happy with the RBNZ’s guidelines that any intervention would be to take the tops and bottoms off the exchange rate’s cycle.
Bollard said the Reserve Bank had always had "very limited expectations about the time and manner in which FX intervention can be effective.”
“In our view, in appropriate circumstances it can have the ability to stabilise the tops and the bottoms of an exchange rate cycle,” Bollard said.
The Reserve Bank did not think it could fundamentally move the trend of the currency as the exchange rate markets were primarily driven by offshore forces, he said.
The RBNZ was also keeping an eye on what other countries were doing, and would keep surveying any innovative approaches to currency controls.
A number of other countries were in the same boat New Zealand had found itself in with exchange rate pressures. Those looking to do things about it often did not have a lot of success, Bollard said.
Govt debt could have effect, but not much
Meanwhile the government’s borrowing requirements could be putting a small amount of upward pressure on the New Zealand dollar, but not at a level that could be accurately measured, Bollard said.
About 60% of the government’s bonds are thought to be bought by foreign investors, requiring them to first have purchased New Zealand dollars, creating more demand for the currency.
“We have in the past seen pressures when New Zealand has had big borrowing requirements, Typically in the past that’s been more though private sector borrowing for housing, and then going through the carry trade and arguably [there is] some pressure on the exchange rate from that,” Bollard said.
“That’s not the case
cast now because the private sector is very constrained.
“But as you know the government sector is going through having to fund a very large deficit. If you’re talking about funding that deficit, well something has to be done while New Zealanders are unable or unwilling to fund it themselves,” Bollard said.
“If you’re talking about early pre-funding of the deficit, well that’s something being driven by concerns that sovereign markets can always be more fragile. When there’s a strong interest in particular bonds then it’s sensible to pre-fund,” he said.
“That could at the margin be having some impact on the exchange rate, but not to the level that we could ever measure – I suspect it’s by no means a significant driver of it.”
(Updates with video of Bollard)