RBNZ's Wheeler prepared to 'scale up' currency intervention as kiwi overvalued by 18 percent

Thursday 30th May 2013

Reserve Bank governor Graeme Wheeler is prepared to ramp up the scale of the bank's currency intervention as he looks to keep a lid on the kiwi, which is 18 percent above its 15-year average.

The central bank has "undertaken some foreign exchange transactions" in recent months to take the heat out of the exchange rate, and will boost the size of that intervention if it sees the opportunity, Wheeler told the Institute of Directors in Auckland. Central bank figures later today will show the size of last month's intervention.

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," Wheeler said in speech notes. "But we are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence."

Earlier this month Wheeler told Parliament's finance and expenditure committee the bank had intervened to take the tops off rallies. The bank last confirmed an intervention in mid-2007 when it sold a net $2.2 billion over two months.

The kiwi dollar fell to as low as 80.95 US cents after the speech from 81.33 US cents immediately before.

The RBNZ sold a net $199 million of New Zealand dollars in December in the course of its normal market operations, adding to the $64 million sold in November, according to Reserve Bank figures. That was the biggest net monthly sale since mid-2008 when the kiwi dollar plunged in the lead-up to the global financial crisis.

The high exchange rate keeps a lid on tradable inflation, which would normally give room for the bank to cut rates if prices stayed below the bank's target band for inflation of between 1 percent and 3 percent.

The kiwi's role in limiting imported inflation is offset by pressure from a heating property market in Auckland and the prospect of a $40 billion reconstruction of Christchurch, which threatens to spark credit-fuelled consumption if households feel wealthy.

Wheeler said the Reserve Bank is concerned about price risks arising from the Canterbury rebuild, how well banks are capitalised to protect themselves from a potential slide in house prices and what the impact of a fall in property values would do to the wider economy.

"While these three risks relate to both our price stability and financial stability mandates, it is the financial stability risk that concerns us most in the current situation," he said.

Wheeler said hiking the official cash rate from its record low 2.5 percent in response to the property market could add to demand for the kiwi, which would in turn push inflation lower, while cutting the rate "would quickly feed into higher house prices and further increase the risks to financial stability."

That means the introduction of macro-prudential tools, which are designed to help take the heat out of asset bubbles, "can play a useful role," he said.

If they were able to take the steam out of the housing market, "it would increase the possibility that the OCR could remain at its current level of longer than through this year," or even be cut if the "exchange rate continues to appreciate and the inflation risk looks low."

Traders expect 29 basis points of hikes to the OCR over the next 12 months, based on the Overnight Index Swap curve.

Wheeler signed a memorandum of understanding with Finance Minister Bill English confirming the policy elements for the tools two weeks ago, and has said it will clearly explain concerns it has about financial stability before rolling them out.

"The Reserve Bank needs to achieve its price and financial stability objectives in this environment," Wheeler said. "Doing so will require us to draw on the full array of policy instruments, including macro-prudential instruments, as appropriate."

BusinessDesk.co.nz

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