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

Thursday 13th March 2014

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.

BusinessDesk.co.nz

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