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RBNZ’s Wheeler doesn’t expect ‘significant’ rise in kiwi, now at post-float high, as rates increase

Reserve Bank governor Graeme Wheeler has told MPs in Wellington that he doesn't expect a "significant" move in the New Zealand dollar as a result of the new interest rate hiking cycle.

The trade-weighted index, a measure of the New Zealand dollar against a basket of currencies, rose to a new post-float high 80.13 today, and recently traded at 80.07 after Wheeler lifted the official cash rate a quarter-point to 2.75 percent and said there could be another 2 percentage points of increases over the next two years. The kiwi climbed to a nine-and-a-half month high against the greenback, and was recently at 85.56 US cents.

The strength of the currency was largely due to New Zealand's 40-year high terms of trade, which measures the quantity of imports the country can buy with a set amount of exports, Wheeler told Parliament's finance and expenditure committee. With most advanced economies running near-zero interest rates and unlikely to start raising rates until next year, New Zealand's rates will become more attractive, though Wheeler said and the market is largely prepared for that.

"The issue is how much of that is already embedded in forward rates, and we think a great deal of that is already embedded into the yield curve," Wheeler said. "So we wouldn't expect to see significant exchange rate effects from this tightening phase. We could be wrong of course, but we wouldn't expect to."

The central bank anticipates the currency will remain elevated over its projection through to March 2017, "depreciating only gradually," according to today's monetary policy statement. The bank sees the TWI averaging 78.4 in the current March quarter, falling to 78 next year and 76.6 in March 2015

Wheeler said the central bank has been concerned about the strength of the currency and its effect on exporters for some time, and that the level of the exchange rate isn't sustainable in the long run.

Last year the Reserve Bank intervened in foreign exchange markets in an attempt to take the top off the kiwi's rally, selling a net $256 million in April 2013. That was the first time the central bank confirmed such an intervention since mid-2007 when it sold a net $2.2billion over two months. The bank had an intervention capacity of almost $9.5 billion in January, according to central bank figures.

Assistant governor Grant Spencer told the committee the elevated terms of trade was the major driver for the strength in the currency, although New Zealand's relative interest rate advantage was a relevant factor.

"We assume the terms of trade will come off over the forecast track to some extent and the exchange rate will come off in line with that," Spencer said.


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Comments and questions

He must be from another planet, it jumped a cent immediately. As a manufacturing exporter its already too high for us to have any prospect of a sustainable business.

Wheelers statements show how out of touch with reality he is. Higher rates attract more foreign money.

Wishful thinking, He knew that the dollar would rise, and that his past attempts to talk it down carried little weight. Exporters now have to face the consequences of this.

Where is this man at? our exchange rate is high because our interest rates are higher than pretty much anywhere else, simple as that
and he now admits "the curreny will be over valued till 2017
and thats not sustainable in the long run". Sunshine I can tell you it's not sustainable for any exporter except maybe dairy in the short term let alone the long term
Shut the factory, sack the staff, scrap the plant at least I get the super in a couple of months. Mr Wheeler sir I cant wait till 2017 for a competitive dollar and any way I dont believe you when you demonstrate with this statement you dont actually understand the fundamentals out here in the real world

Agree with all above. Wheeler did not need to raise the rates. If he was that concerned with inflation then why cant he isolate the areas causing it rather than using a sledgehammer to knock in a nail. e.g. the Auckland housing market. construction costs in Canterbury. Surely between himself and Government alternative mechanisms could be in place. It may require some legislation but isn't that what government's do?

Mr Wheeler's decisions on the OCR are only as good as the capacity utlization projections he bases them on. Is there any reason to believe the projections are any better now than they used to be when Mr Brash was the governor? The economic damage done by his consistently unfortunate decisions was sometimes put down to hysteresis, but that was a bit generous to him (or perhaps it was a malapropism).

All excellent comments above. Increasing the OCR just doesn't make sense. To cover some different territory in the discussion if the NZ economy was doing so well then I would have expected to see the tax take higher as well yet this didn't happen as the Government had a higher than expected deficit issue.

The RBNZ needs to explain how the interpret the words Financial Stability.....who's financial stability are they concerned about? Their own, the trading banks, the Governments debt? Because raising the OCR is certainly not in the benefit of most NZers.
They also need to explain the effects of OCR increases on bank reserves.....
How much created out of thin air money does the NZ banking system have?