RBNZ Says Kiwi Tweak Is Step Toward Possible Intervention

Updated on
  • Bank said lower dollar ‘needed’ instead of ‘would be helpful’
  • ‘It’s not a slap across the face, it’s a little nudge’

New Zealand’s central bank changed its language on the local dollar to indicate growing unease with its strength, a step toward possible intervention, Assistant Governor John McDermott said.

“It’s a subtle change of language, think about it as the first step,” McDermott said in an interview Thursday in Wellington. “The markets should notice. It’s not a slap across the face, it’s a little nudge.”

The currency has risen more than 7 percent against the greenback over the past three months, before falling today on the Reserve Bank’s talk of intervention. The RBNZ said in a policy statement earlier Thursday that “a lower New Zealand dollar is needed.” In its previous statement in June, it said “a lower New Zealand dollar would be helpful.”

“It’s a turn of the dial,” McDermott said.

Read about today’s RBNZ rate decision here

The bank uses a traffic-light system to gauge whether the currency has reached unsustainable or unjustified levels, at which point it assesses whether to intervene. It last did so in August 2014, selling more than half a billion New Zealand dollars to weaken the kiwi.

“The traffic lights might not be on, but we’ve been suffering here for a while,” McDermott said. “We are still uncomfortable. It does need to adjust down.”

The New Zealand dollar fell more than half a U.S. cent on the comments to trade at 72.64 cents at 5:55 p.m. in Wellington. It fell a similar amount earlier Thursday when RBNZ Governor Graeme Wheeler told a parliamentary committee that currency market intervention “is always open to us.”

“We do have intervention capability,” Wheeler said. “We’ve got a traffic-light system, we have used that in the past, we constantly look at what our models suggest and where the exchange rate is, so that’s something that is always open to us.”

The kiwi’s strength is a headache for the RBNZ because it damps import prices and suppresses inflation. The central bank, which has cut its benchmark rate to a record-low 1.75 percent, today forecast inflation will slow to 0.7 percent by the first quarter of next year. 

The RBNZ, which targets inflation of 2 percent over the medium term, currently projects it won’t raise rates for two years even as the economy expands more than 3 percent a year.

McDermott said the outlook is evenly balanced, and current policy settings should be sufficient to gradually return inflation to target. The RBNZ has “a more medium-term focus” than the market and believes that “keeping things steady is important,” he said.

“If we need to change, we need to change, but there’s nothing big enough that’s forced that at this point,” McDermott said.

— With assistance by Benjamin Purvis

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