English Says Kiwi Dollar Unlikely to Drop as Growth Slows
New Zealand Finance Minister Bill English said the nation’s currency is unlikely to weaken even as economic growth slows and the central bank puts interest-rate increases on hold.
“We would prefer our dollar to be a bit more competitive in these circumstances,” English said in a telephone interview from London yesterday. “We don’t see much likelihood of that.”
New Zealand’s currency, nicknamed the “Kiwi” after the country’s indigenous flightless bird, has appreciated almost 13 percent against the U.S. dollar in the past four months. That’s undermining an economic recovery already burdened by weak household spending, a stagnant housing market and last month’s magnitude 7 earthquake that destroyed buildings and shut businesses in the South Island city of Christchurch.
“The strength of the kiwi is one of the headwinds for our recovery,” English said. “Usually at this stage of a recovery the dollar has dropped against the U.S. considerably and that beefs up our export sector. That hasn’t happened.”
The kiwi rose to 74.19 U.S. cents after the comments were published before easing back to 74.09 at 7.15 a.m. in Wellington, little changed. While English said U.S. dollar weakness is partly to blame for the currency’s gains, New Zealand’s relatively high interest rates are also making its assets more attractive.
At 3 percent, New Zealand’s benchmark rate is one of the highest in the developed world. It compares with 0.5 percent in the U.K. and 1 percent in the euro region. The U.S.’s key rate is close to zero.
Rates on Hold
New Zealand’s economy expanded 0.2 percent in the second quarter from the first, less than a quarter of the 0.9 percent growth forecast by the Reserve Bank.
English said while the economy is unlikely to fall back into recession, the risks to the outlook are “on the negative side” and growth may not reach the Treasury’s forecast of 3 percent this year. The Reserve Bank has postponed further rate increases and won’t raise borrowing costs as much as initially planned, he said.
“It’s lowered the curve looking out over the next 18 months fairly significantly,” English said. “Where six months ago people were assuming a reasonably steep rise in interest rates, that looks less likely.”
The central bank, which has raised its key rate twice this year in quarter-point steps, may now keep it on hold “into next year,” English said. “Nevertheless -- and that will put some pressure on consumers -- interest rates are going to rise. It’s going to be another headwind for the recovery as they move into gradually raising interest rates again.”
English is in Europe to meet U.K. Chancellor of the Exchequer George Osborne, Bank of England Governor Mervyn King and international credit rating companies before flying to Washington for a meeting with U.S. Treasury Secretary Timothy Geithner.
English said he’s interested in learning more about the U.K. government’s plans for fiscal consolidation and improving public-sector efficiency.
New Zealand remains on target to return to a budget surplus in 2016, even though the slower economic recovery “puts some risk” on tax revenues, he said.
Fitch Ratings yesterday affirmed its AA+ rating on New Zealand with a negative outlook and English said he doesn’t expect any change in the country’s ratings in the near term.
“We would hope looking out over the next few years, though, that relative to others our ratings can improve,” he said.
English said the main reason for the deterioration in New Zealand’s short-term growth outlook is that households are adjusting to the post-crisis world “more quickly than we thought.”
“The savings rate has increased quite significantly and consumption has been flat now for a good 18 months,” he said. “While in the short term it means there is a bit less certainty about the speed of the recovery, in the longer term it’s the right kind of adjustment.”
Longer-term growth prospects remain “pretty good” as New Zealand rebalances its economy away from domestic consumption and toward greater export competitiveness, English said.
“We happen to be fairly positive about our export story,” he said. Commodity prices “have been holding up” and “underlying demand for our products is strong.”
New Zealand has also focused on exporting more to faster- growing economies in the Asia-Pacific region, for example by signing a free-trade agreement with China.
Exports to China
“By 2015, Australia and China will represent 40 percent of our exports,” English said. “The markets that are struggling particularly with the aftermath of the financial crisis -- being the U.K., the U.S. and Europe -- are becoming less significant, but still high-value export destinations.”
In his discussions with U.S. officials, English said he’d be “particularly interested in their view about exchange-rate policy,” notably regarding China’s yuan.
“We’re obviously not a participant in the debate, but an appreciating yuan is bound to help us with the shift in focus of our export market to China,” he said. “We’re doing well with the rate as it is, we just want to get a better feel for how the rates are going to move.”
English said a tax package introduced by the government on Oct. 1, which lowered income taxes and raised the rate of sales tax to 15 percent from 12.5 percent, was part of its efforts to rebalance the economy.
“We’re making significant changes to our tax system because we’re not going to get structural change through the exchange rate,” he said. “We’re going to work on the bits we can influence.”
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