Wheeler talks more intervention

Currencies

RBNZ Governor says the central bank will intervene more in currency markets if it sees the opportunity to have a greater influence

30th May 13, 8:51am by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

The Reserve Bank is prepared to "scale up" its currency intervention if it sees opportunities to have a greater influence in the value of the Kiwi dollar, governor Graeme Wheeler said today.

The governor also said, if housing price pressures abated, there might actually be a possibility of lowering official interest rates.

In a speech to the Auckland Institute of Directors he reaffirmed that the RBNZ had been intervening in the currency markets due to concern about the high value of the Kiwi dollar. The value of the Kiwi dollar dropped by about US0.4c to around US80.9c in reaction to Wheeler's comments.

Wheeler first confirmed that the RBNZ had been intervening in the currency markets when appearing before a Parliamentary select committee earlier this month. Wheeler's comments today have come ahead of the release by the central bank this afternoon of figures for April that will indicate what level of intervention there has been in the currency markets.

Additionally, the RBNZ has been working on new "macro-prudential tools" as additional instruments to help promote financial stability. A deal between Finance Minister Bill English and Wheeler has cleared the way for the central bank to use so-called macro-prudential tools, if it chooses to, on a temporary basis to dampen excessive growth in credit and asset prices and strengthen the financial system.

Economists said today that the tone of Wheeler's speech indicated the RBNZ was keen to try out its new macro-prudential tools sooner rather than later.

Wheeler said the Reserve Bank has been responding to the rising exchange rate through two avenues: in maintaining the Official Cash Rate (OCR) at an historically low level [2.5%]l; and through a degree of currency intervention.

“The downward pressure on inflation exerted by the high exchange rate means that the OCR can be set at a lower level than would otherwise be the case.

"In recent months we have undertaken foreign exchange transactions to try and dampen some of the spikes in the exchange rate," he said.

“But we are also realistic. We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi. We are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence.”

Risks to stability

Wheeler said that the Bank is also concerned about the financial stability risks associated with the housing market, in particular the scale of housing lending, and especially high loan-to-value ratio (LVR) lending.

He said a strong run-up in housing markets can be a risk to future financial stability because it can increase both the risk of a sharp correction and the consequent financial sector disruption.

"The Reserve Bank is concerned that the current escalation of house prices is increasing the probability and potential effect of a significant downward house price adjustment that could result from a future economic or financial shock. These concerns are shared by the OECD and by the IMF in its recent review of the New Zealand economy, and housing risks have been noted recently by all three of the major international credit rating agencies.

“...Risks associated with excessive housing demand could normally be constrained by raising official interest rates and letting them feed through into higher mortgage costs. However, this would carry significant risks of a further strengthening in the exchange rate and further downward pressure on tradable goods prices. This might, in turn, be expected to push CPI inflation further below the 1% to 3% target range.

Useful policies

“This is where macro-prudential policies can play a useful role in promoting financial stability. Capital and liquidity overlays can help build up buffers in the banking system while adding to the cost of bank funding. And loan-to-value restrictions may help to reduce the actual supply of mortgage lending.

“If house price pressures abated, it would increase the possibility that the OCR could remain at its current level for longer than through this year. Similarly, if housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the OCR,” Mr Wheeler said.

“Macro-prudential measures can be useful in helping to restrain housing pressures, but they are no panacea. This reinforces the importance of measures to enhance productivity in the construction sector, free up land supply, and examine related tax issues.”

He reiterated the warning first issued by deputy governor Grant Spencer last month that if the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely - namely higher interest rates.

Difficult challenges

Wheeler said that the exchange rate and the housing market present difficult challenges for monetary policy when both the currency and asset prices appear to be overvalued and investor demand is expected to remain strong.

“New Zealand’s exchange rate is significantly overvalued. Fortunately it has retreated a little in recent weeks with a stronger US dollar.

“However, investors seem undeterred by the fact that our exchange rate is over-valued, the current account deficit is sizeable and private sector external indebtedness is high. For the current exchange rate to be sustainable in the long term, sizeable increases in the terms of trade and/or productivity would be needed. “Investors also appear to downplay the liquidity risks inherent in a small market like New Zealand.

"This is reflected in our past exchange rate cycles that have exhibited substantial overshooting followed by sharp and rapid exchange rate depreciation."

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20 Comments

by Basel Brush III | 30th May 13, 9:01am 1369861313

Is he sure John and Bill will let him?

Maybe he should watch the Israelis and learn.

by Colin Riden | 30th May 13, 9:27am 1369862831

Is he sure John and Bill will let him?

Are you suggesting that Wheeler is doing anything other than what he has been directed?

Wheeler doesn't say much in the article, but what he appears to repeat three times (or maybe that was journalistic repetition and possibly now modified):

The governor also said, if housing price pressures abated, there might actually be a possibility of lowering official interest rates.

Take home message: The RBNZ will not allow any deflation in property prices.

by Wolly | 30th May 13, 9:48am 1369864114

Or put another way...the banks that run the economy will not allow their private profit factory to crimp their game.....John and Bill have been told.

Property prices will continue to climb ahead of real inflation.

by Stephen Hulme | 30th May 13, 9:59am 1369864758

“If house price pressures abated, it would increase the possibility that the OCR could remain at its current level for longer than through this year. Similarly, if housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the OCR,” Mr Wheeler said.

Exactly Colin - a narrow focus on one tool of economic growth - not a mention of any possible productive explosion in business employment underpinning the ability of the nation to service the mortgages on these houses.

Wheeler's outlook is noticeable in contrast to Carney's, his counterpart in Canada.

The Canadian dollar rose against its U.S. peer for the first time in four days as outgoing Bank of Canada Governor Mark Carney left interest rates unchanged and retained his warning they could rise as economic growth progresses.

The currency strengthened from the lowest level in almost a year before data May 31 forecast to show the nation’s gross domestic product grew 2.3 percent at an annual rate in the first quarter, compared to 0.6 percent growth the previous period, according to a Bloomberg survey of 23 economists. Carney noted in his final policy meeting that first-quarter growth will probably exceed the bank’s April forecast of 1.5 percent. He will be succeeded by Stephen Poloz on June 3. Read more

I thought Bill English and the prime minister were making calls for even higher rates of economic growth.

by Colin Riden | 30th May 13, 11:06am 1369868809

I thought Bill English and the prime minister were making calls for even higher rates of economic growth.

You mean current account deficit increasing, borrow and spend growth in aggregate demand so the government can claim a so called surplus driven by the higher tax take?

by Stephen L | 30th May 13, 9:18am 1369862283

Am still warming to Mr Wheeler. Could not have explained his dilemma between the OCR and the exchange rate any better. If only Bill English would get with the programme, and accept direct funding of say the Chch rebuild, then Wheeler's job would be significantly easier. Just needs a phone call, Bill.

Here in the Telegraph, New BOE governor to devalue sterling, there is a suggestion Carney will be very aggressive indeed, especially given the pound has already come off since the GFC. No sitting back and taking it in the currency wars there. Clearly the Conservatives in the UK (arguably somewhere close to the Nats in philosophy) are much happier printing to fund their deficit than the Nats are. It would be ironic if the Greens here were closest to the Conservatives in monetary management.

by Boatman | 30th May 13, 12:23pm 1369873439

On the surface of it , the profits are too good not to take a bet , and Wheeler is on a hiding to nothing if he thinks he can , to use his words "diminish investor perceptions that the New Zealand dollar is a one-way bet,"

If you bought $100k worth of Aussie $ a month ago at 80 cents , and sold on Monday at 86 cents the gain is just shy of 3,5 % in a fortnight .

3,5% in 2 weeks vs 1,5% to 2,5% per annum from a bank deposit .

And , the currency traders at Goldman Sachs are picking the NZ $ at 90cents to the Kiwi , so theres a one way bet if you ever saw one.

However , in my suspiciuos mind , I ask why the boys at Goldman's would share such information? Maybe they have some open positions on the currency and have short sold it .

If Wheeler really wants to stop this in its tracks , the mere threat or talk of introducing a partially managed currency, a la Malaysia would do wonders.

We need to act in our own interests on the global stage .

by Stephen Hulme | 30th May 13, 2:12pm 1369879953

If you bought $100k worth of Aussie $ a month ago at 80 cents , and sold on Monday at 86 cents the gain is just shy of 3,5 % in a fortnight .

3,5% in 2 weeks vs 1,5% to 2,5% per annum from a bank deposit

Boatman - are we talking about NZD/AUD or some other currency?

Because if we are: + AUD 100,000.00/0.8000 = - NZD 125,000.00

then if we sell: - AUD 100,000.00/0.8600 = + NZD 116,790.70

A loss!!!!!!.

by Boatman | 30th May 13, 2:47pm 1369882072

Apologies , my error , what I meant was if an Aussie trader or speculator bought AUS $100k of NZ$ ,

by Stephen Hulme | 30th May 13, 3:00pm 1369882826

Thought as much: short 100,000 AUD versus long NZD.

by Boatman | 30th May 13, 2:48pm 1369882099

Apologies , my error , what I meant was if an Aussie trader or speculator bought AUS $100k of NZ$ ,

by Stephen Hulme | 30th May 13, 2:12pm 1369879926

by Stephen Hulme | 30th May 13, 4:40pm 1369888839

His intervention reserve is now at $8.5billion - Kimy link please - before you rush in the RBNZ has unlimited capacity to print NZD to sell in the FX market place.

by Stephen Hulme | 30th May 13, 5:15pm 1369890936

Your link refers to the NZD value ( NZD 8.476bn) of foreign currency positions available for sale to purchase NZD - that is to support a crashing NZD - this is certainly a limited capacity reserve to act in our defence if a large HF speculator decided it was a fun day out to sell $KIWI. But the RBNZ can print to sell NZD in unlimited quantities, subject to political approval - such action would increase foreign reserves.

by Stephen L | 30th May 13, 6:26pm 1369895202

kimy,

Being pedantic, I don't think it is taxpayer dollars, in the sense that I don't believe taxes have ever been collected to put into this fund. I hope and expect it has been the Reserve Bank tapping a few keys on a keyboard. Accounting standards may then suggest any paper losses or gains are recognised in the annual accounts; with the actual assets also recognised on a balance sheet, but none of it will have cost any hard earned taxes.

Separately, assuming he has bought a mix of our trading partner currencies, then it seems to me he might well have timed things pretty well. The TWI that David links us to every day has come off markedly in the last month, even if against the Aussie the NZD has gone up.

by Stephen Hulme | 31st May 13, 2:05pm 1369965901

The table clearly says market intervention reserve which means RBNZ mandate is limited to NZD8.5billion to sell NZD. No confusion here. Very crystal clear and every trader knows how limited the Intervention fund is.

You are wrong - RBNZ confirms as much.

by Grant A | 30th May 13, 8:02pm 1369900949

Kimy, why did I just know you would. I have a problem with just the Chch rebuild, I think we should print more and cure poverty in the world - what do you have against poor people ? Or are you thinking that money printing (i.e. painless spending beyond your means) has a limit ? If so, can you please tell me, and the RBNZ, where that limit is and why those human beings (central bankers and politicans) that go down this route always eventually find where that is in an extremely painful way for tax payers (and non-tax payers in particular).

by Stephen L | 30th May 13, 8:36pm 1369903013

Grant,

why those human beings (central bankers and politicans) that go down this route always eventually find where that is in an extremely painful way for tax payers (and non-tax payers in particular).

Given there are an awful lot of central bankers doing exactly this at present, can you point to how they are all wrong, and indeed how it is clear that it has or will end badly, compared to the alternatives.

I certainly agree with Russel Norman asking for an intelligent debate on printing , rather than just have Key, Joyce and English guffawingly dismiss it as though Norman absurdly thinks the world is round, while they of course just know it's flat. By the by, I'm not sure my car would be welcome in the car park for a Green meeting, but on this point, they make the most sense to me.

There are probably good reasons for and against; and of course there are limits- it isn't hard to consider outcomes of the exchange rate, unemployment, inflation and so on, as well as any spin off effects on say asset bubbles or interest rates.

I like to think here, Friendly discussion on tax and printing, that Matt Nolan has started making the case against printing, and I'm doing my best for the affirmative. Given a lot of the world is doing it, there should at least be a debate.

by Grant A | 30th May 13, 8:49pm 1369903792

Stephen my second response to Kimy answers that, just because everyone's doing it isn't a sign its right, it's either a sign of desperation or just a common "we're all doing it so it must be right". Examples of that in the last 20 years ? Every stock buyer at the top of a grossly over valued stock market in the late 1990's, house buyers in the US and other places in the mid 2000's, how far back do I need to go to find dozens of examples.....NZ finance companies in the mid 2000's etc etc. This is just another classic example and the most gigantic case of the same thing where the pubic, who have no time for politicians and central bankers decision making at the best of times, want to desperately believe that in this case they know what they're doing, despite history making a joke of that.

by Grant A | 30th May 13, 8:03pm 1369901036

And isn't "everyone's doing it" just the classic no idea statement