New Zealand’s exchange rate is over-valued by about 15 percent and attempts to lower it through intervention would be futile against rising demand from global investors, the International Monetary Fund said.
“What’s driving a lot of the strength of the exchange rate is the fact that New Zealand is relatively well positioned compared to the global situation and New Zealand is a relatively safe place to park your money,” said Brian Aitken, IMF Mission Chief to New Zealand, in a Wellington media briefing yesterday.
New Zealand’s dollar, the second-best performing of the Group of 10 currencies over the past year, is likely to remain elevated as long as loose monetary conditions exist around the world, said Aitken. Along with the Australian, Canadian, Swedish and other currencies, the kiwi has strengthened as nations such as the U.S., Japan and the U.K. maintain interest rates to near-zero and undertake quantitative easing to boost their economies.
Targeting a lower New Zealand dollar through intervention would be expensive and largely ineffective as the currency is one of the most widely traded relative to the nation’s size, said Aitken. It could also cause long-term damage to what the IMF regards as a solid monetary policy framework, he said.
“The ability to pick the price through intervention is probably very limited without causing all other kinds of distortions,” he said. “Ultimately, taxpayers of New Zealand would be paying a very high price.”
Reserve Bank of New Zealand Governor Graeme Wheeler last month warned investors that the kiwi wasn’t a “one-way bet” and that, while the central bank was prepared to intervene and influence the currency, it could only attempt to “smooth the peaks” given the strength of capital inflows.
Wheeler left the official cash rate at a record low 2.5 percent last week and signaled he may reduce borrowing costs if the kiwi rises more than the economy justifies. That scope to lower rates provides New Zealand with a buffer against any near-term shocks, with monetary policy “serving as the first line of defense,” the IMF said in a separate statement.
While the IMF regards the central bank’s policy stance as appropriate, new challenges have emerged including inflation pressures from the Christchurch rebuild, rising house prices and the economic impact of the nation’s worst drought in 30 years.
“With expected inflation within the target range, the strong New Zealand dollar, and efforts to reduce the budget deficit, monetary policy should remain accommodative,” the IMF said in the statement.