Rate cut would not have helped currency, says Bollard

Cutting the official cash rate would not have done anything to help exporters, Reserve Bank governor Alan Bollard told MPs this afternoon.

Quizzed by Green Party co-leader Russel Norman about why he had not cut the OCR to help exports, Dr Bollard told Parliament's finance and expenditure select committee there is not the clear or simple link Dr Norman was assuming between the two.

Had he cut the OCR today, instead of leaving it at 2.5%, it might have dropped – but it could have risen.

"I get a lot of free advice from exporters on the level of the exchange rate," Dr Bollard told MPs.

"Most of them don’t really see that close relationship that you are proposing between the exchange rate and the OCR," he told Dr Norman.

The overnight index swap markets had priced in a roughly 25% to 30% chance of a rate cut between now and the end of the year.

One reason most economists expected Dr Bollard to stand pat in today's rate review was because the last time he cut the rate the kiwi dollar subsequently hit a record high.

Dr Bollard made an emergency rate cut in March last year and after a short dip the OCR eventually went above 88 US cents, the highest level ever.

On reason for this was currency traders – including some overseas central banks – bought up New Zealand currency because they were fairly certain the next move would be upwards and they could make a killing on the trade.

A cut today left the Reserve Bank with a two options, depending on what happens: a further deterioration in the economy, or a lock-up of wholesale funding markets after another round of eurozone financial panic stations.

But it also means the currency markets do not have a one-way bet.

There is no doubt the exchange rate is too high – something Dr Bollard reiterated today.

"The exchange rate is above a level one would like to see for the sustainability of New Zealand 's long-term competitiveness." 

However much of this is caused by overseas turmoil.

"We've said that if you know what the Greek economy is doing overnight I can tell you what the dollar is going to be doing tomorrow…

"You've also got the situation where some of the world's biggest economies have done some very large quantitative easing and that directly or indirectly had an impact on the New Zealand dollar.

"When that is the big driver, we don't feel there is much we can do about that."

Some countries had staged interventions and competitive rounds of printing money, and the Reserve Bank is watching those to see if they work, he said.

But so far none of them would be suitable for New Zealand and all would be costly, he said.