By Alex Tarrant
The Reserve Bank of New Zealand has taken a huge swipe at the level of the New Zealand dollar, saying although the high currency helps contain inflation, it is detrimental for the country’s tradable sector, undermines GDP growth, and inhibits rebalancing.
And there is a risk that global central banks keep depreciating their countries’ currencies, which could see the New Zealand dollar rise even further. However the RBNZ said its central projection was for the NZ dollar to fall slightly over the next three years.
The Reserve Bank also noted that if the currency did continue to rise to a point where it was bringing down its future inflation expectations, there was always the prospect of cutting the Official Cash Rate, which it left on hold today at 2.5%.
The New Zealand dollar has risen 7% on a Trade Weighted Index (TWI) Basis since the Bank’s last Monetary Policy Statement (MPS) in December. This morning the TWI sat around 72.5 – a level at which the Reserve Bank has intervened in currency markets before, although back at its major intervention in 2007, commodity prices were considerably lower than they are now.
Today, the Bank gave itself considerable space in its Official Cash Rate commentary, and in its March quarter MPS, for remarks on the level of the currency.
Monetary policy easing, including quantitative easing, or money printing, by central banks around the world had lead to an improvement in global risk sentiment, causing the NZ dollar to increase “substantially”.
“This appreciation has occurred at a time when New Zealand’s export commodity prices have tracked sideways. There is a risk that this dislocation continues,” the RBNZ said.
“Major central banks are likely to continue to expand their balance sheets, which could weaken their currencies further,” it said.
“While the strong New Zealand dollar is helping contain inflation, its high level is detrimental to the tradable sector. Based on the assumption that the exchange rate slowly depreciates over the next few years, all else equal, the Bank expects to modestly increase the OCR over the projected horizon [to March 2015].”
The high dollar would reduce the revenue received by exporters, which could translate into weaker capital spending by the primary sector, the RBNZ said.
“That said, there have been some recent signs of stabilisation in the world prices of New Zealand’s commodity exports, and prices remain at elevated levels. Oil prices have increased sharply recently, in part due to geopolitical concerns,” it said.
“The high New Zealand dollar is affecting trade volumes and production in the tradable sector; goods exports slipped back in the September quarter. Meanwhile, imports increased sharply, as cheaper New Zealand dollar import prices caused households and firms to switch expenditure.
“This switch is evident in the manufacturing sector, where despite exports exceeding the pre-GFC level, domestic production remains markedly down, suggesting that import-competing manufacturers are struggling,” the RBNZ said.
'If it keeps going up, we could cut the OCR'
New Zealand and a number of other small open economies were having their currencies driven quite high by a number of features, principally from offshore due to a considerable a amount of monetary stimulus from the major central banks around the world, Bollard told media at a press conference on Thursday morning.
“When that all happens we do worry about the potential for competitive monetary stimulus. It certainly would be a disappointment if we got this far through the global financial crisis without an outbreak of competitive trade barriers, as we have worried about, only to run into competitive monetary stimulus," Bollard said.
“We all know that there's a number of countries around the world who are quite concerned about this at the minute. They’re ones with their own currencies, it’s not just New Zealand. I’ll put in the same boat Australia, Canada, some of the Scandinavians, some of the Latin Americans, and some of the Eastern Europeans as well," he said.
“But, at least from our point of view, we do see that being driven at least in its recent manifestations primarily from interernational pressures, rather than from New Zealand pressures. In that sense it’s limited what New Zealand can hope to do about it.
"Of course, were we to see [a] strengthening New Zealand dollar, and were we to see that strengthen to a point where it was actually bringing down our future expectations of inflation, then we always still have the prospect of reducing the Official Cash Rate in response to that,” Bollard said.
(Updates with comments from press conference)
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widely accepted economic wisdom may be fundamentally inappropriate in “the real economy”, and the scope for potential losses in “the real economy” driven by such fundamentally inappropriate economic wisdom is almost infinite. Read more
The wisdom contained in the above statement is starkly exposed by comparing the OCR rate differentials between Australia and here.
This is what the RBA had to say when they left their cash rate unchanged @ 4.25% earlier this week:
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.25 per cent.
Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring. Several European countries will record very weak outcomes, but the US economy is continuing a moderate expansion. Growth in China has moderated as was intended, but on most indicators remains quite robust overall. Conditions around other parts of Asia softened in 2011, partly due to natural disasters, but are not showing signs of further deterioration. Some moderation in inflation has allowed policymakers in the region to ease monetary policies somewhat. Commodity prices declined for some months and are noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels.
The acute financial pressures on banks in Europe have been alleviated considerably by the actions of policymakers, though there is more to do to put European banks and sovereigns onto a sound footing for the longer term and Europe will remain a potential source of shocks for some time yet. Financial market sentiment has continued to improve in recent weeks and capital markets are again supplying funding to corporations and well-rated banks, albeit at costs that are higher, relative to benchmark rates, than in mid 2011.
Most information on the Australian economy continues to suggest growth close to trend overall, with differences between sectors and considerable structural change. Labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months. CPI inflation has declined as expected and will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range. This forecast embodies an expectation that productivity growth will improve somewhat as a result of the structural change occurring in the economy.
Interest rates for borrowers have generally risen slightly since the Board's previous meeting, but remain close to their medium-term average. Credit growth remains modest. Housing prices have shown some sign of stabilising recently, after having declined for most of 2011, but generally the housing market remains soft. The exchange rate has risen over recent months, even though the terms of trade have declined.
With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.
Rubbish - "The high New Zealand dollar is affecting trade volumes and production in the tradable sector; ...."
It is RBNZ's lack of will to intervene in the currency that, " .... is affecting trade volumes and production in the tradable sector; ..... "
This is how it is done, if the will is there:
http://www.johnwalley.co.nz/172-swiss_show_the_way.aspx
Cheers, Les
www.nzmea.org,nz
Using a little logic...
NZ dollar is high... The demand for $NZ comes mostly from ourselves ...and our thirst for borrowing.
SO... lower the OCR... deposit rates go down and savers get even more negative returns ...
Savers decide to shift their money into property... Demand for loans go up.... NZ Banks borrow more money offshore...which causes the $NZ to strengthen even more.
It is not a High OCR that is keeping our dollar strong.... It is our appetite for borrowing...
Why do people think a low dollar will equal a low exchange rate..????
If NZ as a country borrows more and more ..our exchange rate will remain strong... ( until NZ is percieved as high risk ).
You're quite right.... lowering the OCR may eventually lead to an even higher NZD. Actually the NZD/USD is most highly correlated to the relative economic performances between NZ and the USA, like their GDP growth differences for example. There have been times when we have had a high OCR and a low NZD.
Most people think that a high OCR will mean a high NZD but this is not always the case. What matter most, is what the underlying economy is doing.
The only thing that will help stop rampant speculation in property is capital controls. Slap a maximum 80% LTV ratio on banks lending money to homeowners, that would do the trick. That way we'd get the savings rate of the nation up as we'd be forced to save for the deposit. This does not penalize anyone with taxes or anything either.
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