Bollard talks down impact of rate hike on kiwi, raises problem with intervening

Wednesday 21st October 2009

Central bank Governor Alan Bollard damped down the likely impact of a rate hike on the kiwi dollar, telling parliamentarians the markets are already ahead of monetary policy.

At Parliament’s Finance and Expenditure Committee, the Reserve Bank Governor said any rate hike on his part probably wouldn’t have much of an impact on the kiwi dollar, as the markets have already started pricing in rising interest rates.

“We don’t want to see the New Zealand dollar being put under unnecessary pressure again,” Bollard said. “If and when we were to increase rates would you see that impact on New Zealand dollar? No, actually the markets already think quite a long way ahead of where we see monetary policy.”

He also warned that the bank couldn’t intervene without taking longer view to the consequences of its actions. “You shouldn’t be short-term overactivist and then regret it in the medium term,” he said.

The main driver of the currency on a trade-weighted basis was the greenback and pound, with the yen, euro and Australian dollar not really coming into play, according to Bollard. The kiwi fell to 75.01 U.S. cents from 72.32 cents at the start of the month. It’s soared almost 50% against the greenback from its sub-50 cents low in March.

Yesterday, AMP Capital Investors’ head of investment strategy Jason Wong told a media briefing that the kiwi dollar still had a way to run, and “70 could be the new 60” for the currency. Wong predicts the central bank will hike rates earlier than expected in March, though it can’t do it earlier without denting the Governor’s credibility.

For several months Bollard has reiterated his mantra that rates will remain “at or below current levels” until the latter half of next year. Markets are pricing in a rate hike as early as January after Australia’s central bank boosted interest rates 25 basis points earlier this month, the first G-20 nation to embark on tightening monetary policy.

At the same hearing, Deputy Governor Grant Spencer confirmed New Zealand’s central bank was trying to move its assets away from the greenback as the world’s reserve currency remained out of favour with investors.

“We’re trying to reduce our exposure to U.S. dollars as it heads south,” Spencer said.

Businesswire.co.nz

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