Kiwi dollar 'significant headwind' for economy, RBNZ's Wheeler says

Thursday 6th December 2012 1 Comment

The persistent strength of the New Zealand dollar has been a "significant headwind" to the economy as it erodes export earnings and encourages local consumers to buy foreign-made goods, according to Reserve Bank governor Graeme Wheeler.

The Reserve Bank has raised its forecasts for the currency over the coming two years, as international money markets chase yields in a low interest rate environment and as major central banks around the world - including the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan - print money in a last-ditch bid to stoke economic growth.

"The high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demands for imports," Wheeler said in Wellington.

The bank sees the kiwi dollar holding above 73 on a trade-weighted basis until December 2013, and falling to 71.40 in early 2015.It previously saw the TWI falling below 72 next year, sliding to 68.6 by March 2015.

The kiwi dollar climbed to 82.76 US cents after this morning's monetary policy statement, from 82.49 cents immediately before. The trade-weighted index rose to 73.86 from 73.62.

The central bank said the strength in the kiwi dollar has discouraged foreigners from visiting New Zealand by eroding their spending power and has added to the woes in the local manufacturing sector by reducing their price competitiveness.

At the same time, it has encouraged locals to "obtain greater quantities of imported goods and services without spending more of the incomes on imports," leaving New Zealand producers out in the cold.

Still, the currency's strength hasn't been all bad, with the bank saying it has contained tradeable inflation and aided some exporters into Australia who have purchased their goods elsewhere.

"The strong New Zealand dollar has also meant that interest rates are lower than would otherwise be the case," the bank said.

BusinessDesk.co.nz

Comments from our readers

On 7 December 2012 at 11:28 am Rob Chrystall said:

There is a missing link in reserve bank policy where the governor should and must arrive at various systems that could be tried to attempt to correct such things as exchange rate and house price escalation . Over the last ten years when NZ inflation rate was very low, the trading banks increased the money supply in some years by 15percent but looks like over 10 percent a year . It's easy to see where house price and farm price escalation comes from. Friedman states in texts books on economic theory as used by all western economy universities "the increase in money supply is never allowed to exceed the inflation rate" Why has the NZ govt and reserve bank allowed this to occur? Why? The with holding tax rate on interest earnt by foreigners currently is zero or 2 percent. If reserve bank advised govt to raise this to NZ tax rates at least or more. Then the demand for the NZ dollar , the 7th most traded currency would drop. Even a IRD consultant advised this. Yet NZ continues to wallow without certainty along a road to economic disaster, as unlike all other oecd countries , we are so reliant on primary based exports yet the exchange rate kills primary exports. Why continue to allow currency investors traders to control nz's export income? Why?