New Zealand’s dollar may stay strong and there isn’t much that can be done because investors are attracted to growing economies, according to the nation’s central bank.
“It’s hard at this point to see any factor that would lead to a major depreciation in the exchange rate in the short term,” Reserve Bank of New Zealand Governor Graeme Wheeler told parliament’s finance select committee today. He reiterated that cutting interest rates is unlikely to sustainably lower the local dollar.
The so-called kiwi has gained about 6 percent this year, the best-performing Group of 10 currency, as global interest rates fell and investors look to economies with sound policies, improving economic growth and may benefit from higher commodity prices. The country’s economy expanded 2.6 percent in the year ended June 30 and growth is forecast to accelerate, according to central bank forecasts published in September.
“A period of further strength remains possible” for the local dollar, the RBNZ said in its half-yearly Financial Stability Report released earlier. “This would particularly be the case if New Zealand’s relative growth outlook continued to be perceived as favorable despite the lower terms of trade.”
Wheeler, the former World Bank co-managing director who took over from Alan Bollard in late September, kept the official cash rate at a record-low 2.5 percent in his first decision on interest rates Oct. 25, noting the high exchange rate was undermining export earnings. Today’s report didn’t contain commentary on interest rates.
“There’s no easy solution that says cut interest rates 25 pips and the exchange rate will go down,” Wheeler told the committee. He said quantitative easing, or central bank asset purchases aimed at bolstering liquidity, were “largely a sign of desperation” when policy makers had nowhere further to go on interest rates.
“If the issue is, should we move to quantitative easing in New Zealand, we don’t think that’s something that deserves serious thought at this point,” he said. “We have plenty of scope to cut interest rates if we need to.”
The nation’s economy “has continued to grow modestly” and private-sector credit has begun to rise again after being flat in recent years, the central bank said today.
“Some increase in credit will be necessary to sustain economic growth, but excessive credit growth could hinder rebalancing of the economy and accentuate existing vulnerabilities,” Wheeler said in the report.
The central bank signaled it is monitoring household credit growth as the housing market strengthens.
“If credit demand was to strengthen significantly, and banks were willing and able to accommodate that demand, indebtedness could resume and upward trend eroding households’ resilience to shocks,” it said.
House prices rose 5.3 percent in the year ended Sept. 30, the fastest annual gain since May 2010, according to Quotable Value New Zealand. Prices are overvalued relative to incomes and rents and a substantial price slump could result in strains on household and bank balance sheets, the RBNZ said.
Credit growth is also accelerating in the farming industry led by dairying, the central bank said.
“With debt levels remaining elevated, and revenue and land values sensitive to commodity prices, the agricultural sector is vulnerable to an adverse external shock,” it said.