Bloomberg News

Wheeler Favors Lower N.Z. Dollar Without Unorthodox Policies

October 26, 2012

Reserve Bank of New Zealand Governor Graeme Wheeler

Graeme Wheeler, governor of the Reserve Bank of New Zealand. Photographer: Tomohiro Ohsumi/Bloomberg

New Zealand’s new central bank chief, in his inaugural address, signaled he wants a weaker currency without having to resort to unorthodox policy that may disrupt his efforts to contain inflation.

The Reserve Bank of New Zealand “wishes to see a lower exchange rate provided it can be achieved without damaging price stability and financial stability,” Governor Graeme Wheeler said today in a speech in Auckland. “There are clear limits to what monetary policy and exchange-rate intervention can do to lower the New Zealand dollar.”

Wheeler’s views underscore a challenge facing central bankers in small, trade-dependent economies whose currencies are elevated as investors seek returns unavailable from Japan to the U.S. and Europe, where interest rates are at or near record lows. Even as New Zealand’s unemployment rate rises, growth struggles to accelerate and inflation slows, the local dollar’s 5.3 percent gain this year makes it the best performer among the Group of 10 currencies.

“The high New Zealand dollar is clearly worrying the RBNZ,” Mark Smith, senior economist at ANZ Bank New Zealand Ltd. in Wellington, said in an e-mailed note. Wheeler “is realistic about the impact that domestic monetary policy can achieve. Cash rate cuts to take pressure off the dollar are not in prospect.”

Policy Outlook

The currency, which rose to a three-week high of 82.43 cents yesterday, fell after Wheeler’s speech, buying 81.77 cents at 4:55 p.m. in Wellington. There is a 50 percent chance of a rate cut by March, according to overnight indexed swaps data compiled by Bloomberg.

Wheeler today ruled out quantitative easing and explained that rate cuts are unlikely to achieve a sustainably lower exchange rate. Today’s speech was the former World Bank official’s first since he took over from Alan Bollard in late September.

Yesterday, he kept the official cash rate at a record-low 2.5 percent, forecasting that inflation will accelerate toward the middle of the 1 percent to 3 percent range he is required to target. The decision to pause helped boost the local dollar as traders reduced bets he would cut borrowing costs.

All 17 economists in a Bloomberg News survey today predict the cash rate will be unchanged at the next decision Dec. 6. Thirteen forecast no change until the second half of 2013.

Trade Shortfall

Gains in the so-called kiwi have curbed manufacturers’ exports, limited investment in tourism and hurt the earnings of companies that compete with cheaper imports, Wheeler said today. The nation posted its widest trade deficit since 2009 in the year ended Sept. 30 as exports fell to a 20-month low, a government report showed today.

While Wheeler said the central bank is prepared to sell the dollar, he reiterated there are conditions around intervention. Those include a currency that’s historically and unjustifiably high, and the central bank needs to be sure that the timing of its sales will have an effect.

“Intervention is unlikely to have a sustained impact on the currency but can have an impact in the short term if the Reserve Bank makes the right calls,” he said. “We will remain vigilant on these criteria and will be prepared to intervene if all conditions are met.”

His comments echoed those of deputy Governor Grant Spencer in a 2007 speech. The central bank last disclosed it sold the currency in June 2007.

Union Pressure

Wheeler also downplayed the merits of cutting rates to influence the currency, countering claims from the New Zealand Council of Trade Unions that he should have lowered borrowing costs yesterday.

“Reducing interest rates can at times reduce pressure on the exchange rate but analysis of past OCR cuts in New Zealand shows on average minimal or no intra-day impact on the exchange rate, and even less impact on a weekly basis,” he said. “This reinforces the idea that the exchange rate primarily reflects returns in the broader economy rather than simply returns in the money market.”

To achieve a long-lasting exchange rate decline, the nation needs to tackle its “addiction of depending on foreign savings” to finance consumption and investment, he said.

New Zealand doesn’t need quantitative easing, Wheeler said, referring to central bank asset purchases. There is first scope to cut borrowing costs if needed, he said. The central bank doesn’t see merit in using monetary policy to achieve target rates of economic growth, he said.

Macro-Prudential Tools

The nation’s monetary authority also wants to avoid relying solely on interest rates to counter a housing boom by requiring banks to adjust key balance sheet and loan ratios that may contain their lending. The so-called macro-prudential tools will reinforce the stance of monetary policy, Wheeler said.

An agreement between the central bank and the finance minister is being discussed with the Treasury Department that will confirm the guidelines for operating with such tools, he said.

Consumer prices rose 0.8 percent in the year through September, the slowest in more than 12 years and below the 1 percent to 3 percent range he targets.

A net 14.5 percent of companies expect to raise prices in the next three months, the fewest in three years, according to an ANZ survey of 468 firms published today. The net subtracts those intending to lower prices from those planning increases.

Wheeler, 60, succeeded Bollard on Sept. 26, returning to New Zealand after 15 years that included being co-managing director of the World Bank from 2006 to 2010. Under New Zealand law, the central bank governor alone makes the decision on interest rates after taking advice from a staff panel that doesn’t vote and doesn’t publish its minutes.

Before starting, he signed an agreement with Finance Minister Bill English that included a requirement to focus on keeping annual price changes near 2 percent to help anchor inflation expectations.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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