By Alex Tarrant
The Reserve Bank will be watching its Swiss counterpart’s “bold experiment” of trying to control the Swiss Franc against the Euro, and is concerned about the monetary and currency policies being enacted by the world's larger central banks, as the New Zealand dollar remains overvalued compared to long-term fundamentals.
Governor Alan Bollard said the New Zealand dollar was persistently high and being buffeted by what was happening on global financial markets.
The level of the over-valued currency was a drag for New Zealand’s tradable sector, Bollard said. A silver lining was import costs were cheaper, which helped keep inflation under control, although this was not how the Reserve Bank would prefer to see price stability.
“We continue to be in the situation where the exchange rate in New Zealand is quite a difficult feature. It’s, we now believe, significantly penalising some activity in the traded sector, hurting some New Zealand firms, and that’s a medium-term affect, not a short-term affect,” Bollard told media at a press conference after releasing the September quarter Monetary Policy Statemet.
Those exporters who were able to take advantage of importing inputs in US dollars, while exporting in Australian dollars could do well out of the exchange rate’s position, although that was a small part of the traded sector.
“Basically at the minute, as we’ve really seen over the last six months or so, the New Zealand dollar is just one of those currencies where the levels are being set by trade that’s basically related to what’s been going on in the major economies, and we suspect that will continue for some time,” Bollard said.
“You will see a number of other small, open economies with their own exchange rates under some pressure here. You’ll be observing that a number of them have been looking at other tools – most recently of course the Swiss National Bank looking at trying to peg the Swiss franc – we will watch that with considerable interest as to how successful that might be,” he said.
The Swiss move was “a bold experiment," he said.
Bollard said the Reserve Bank was concerned about the broader monetary policy and currency arrangements of the world’s larger central banks. It had observed a number of smaller economies were under exchange rate pressure and were looking at ways to mitigate that, like the Swiss.
“Those can have some ongoing competitive effects, but generally speaking, those smaller economies aren’t the ones that are starting those – their whole transaction basis is much smaller and they’re not likely to have that competitive devaluation impact,” Bollard said.
“What we’ve seen more recently we don’t think changes things. It’s always a risk, during a period of real international economic problems like this, that we shouldn’t start to see competitive beggar-thy-neighbour type policies, and that is something of course that Europe is struggling with right at the moment,” he said.
See the full news conference video below:
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