RBNZ Says Kiwi Level Still Unjustified, Headwind for Economy

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New Zealand’s central bank reiterated that the nation’s currency remains unjustifiably high, one of the criteria it has set for intervention. The kiwi dollar fell toward an almost five-year low.

“The persistence of the New Zealand dollar at unjustifiable and unsustainable levels” is one of the headwinds facing the economy, the Reserve Bank said in its Statement of Intent published Friday. Others include a softening in the Chinese and Australian economies and a sharp fall in dairy incomes, it said.

Governor Graeme Wheeler cut interest rates this month and signaled a further reduction as he tries to return inflation from near zero to his 2 percent target. A weaker exchange rate would help him achieve his objective by increasing the price of imported goods.

The kiwi dollar fell as much as 0.6 percent to 68.65 U.S. cents, and bought 68.95 cents as of 11:35 a.m. in Wellington. It reached 68.15 on June 23, the weakest since July 2010.

Wheeler said June 11 that the currency remained overvalued and “a further significant downward adjustment is justified.”

He lowered the official cash rate a quarter point to 3.25 percent and most economists predict a cut to 3 percent next month, according to a Bloomberg News survey.

3% Growth

The Statement of Intent is an annual document in which the central bank outlines its plans and policy objectives for the coming three years. The opening remarks, which included the currency comments, are signed by the governor.

In today’s statement, the RBNZ said New Zealand’s economy continues to grow at an annual rate of around 3 percent, reflecting low interest rates, high net immigration, rising construction activity and the decline in fuel prices since mid-2014. It said inflation is expected to pick up as the effect of lower fuel prices diminishes and economic growth gradually exhausts available capacity.

The bank, which plans to impose lending curbs on Auckland property investors in October to quell surging house prices in the city, said it will monitor the impact of the restrictions and “identify further policy measures that may be required to promote financial stability.”

The bank will “explore additional macro-prudential policy options for managing the financial stability implications of housing market cycles,” it said.

It will also publish a stress-testing guide with a view to improving the practices of New Zealand banks, and continue to develop a comprehensive testing framework, according to the document.

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