RBNZ will scale up FX intervention if needed - Wheeler
The Reserve Bank of New Zealand may sell more New Zealand dollars if the currency continues to climb, Governor Graeme Wheeler said on Thursday, adding that such operations would have muted impact given the central bank’s limited firepower.
In a speech to a business group, Wheeler said rising house prices and a “significantly overvalued” currency were posing a challenge to monetary policy, while macroprudential tools could help to restrain housing pressures.
His comments pushed the New Zealand dollar down roughly a third of a US cent to a session low of $0.8092. It has fallen nearly 7 per cent from a 20-month high hit in April, a move the central bank governor welcomed.
Wheeler said the RBNZ had responded to the strong currency, which hit a post-float high versus a currency basket in April, by keeping its official interest rate at a record low and through currency intervention.
“We are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence,” he said.
The central bank acknowledged that its limited capacity to sell domestic reserves on the foreign exchange market meant it could only smooth the “kiwi” currency’s climb and diminish the perception that the currency was a “one-way” bet, rather than influence its value.
Earlier this month the RBNZ disclosed that it sold New Zealand dollars on the foreign exchange market in April. Later on Thursday, the central bank will announced the amount of New Zealand dollars it sold during the month.
A strong currency was a reason that the RBNZ was holding rates at a record low 2.5 per cent even as an ongoing rise in housing prices ramps up inflation risks, Wheeler said.
The RBNZ is hammering out the details of macroprudential tools to help dampen excessive growth in credit and asset prices and fortify the financial system from negative shocks of a housing downturn.
Such measures would offer the RBNZ some wiggle room on monetary policy, Wheeler said, but he said they were not a substitute for monetary policy.
“Macro-prudential measures can be useful in helping to restrain housing pressures, but they are no panacea,” he said.
“If the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely.”
Analysts said that Wheeler was sending a message to the market that more intervention could be in store, while adding that it was unlikely to change the market’s view that the RBNZ will raise interest rates early next year.
“The speech continues to highlight the tension that the RBNZ is facing with rising pressures in the housing market but at the same time the strong New Zealand dollar,” ASB economist Christina Leung said.
“It shows that the Reserve Bank is willing to be more active in the macroprudential space and also in terms of its passive intervention.”
ASB expects the RBNZ to raise rates by 25 basis points in March, in line with the majority of economists in a Reuters poll. Rate futures suggest the market has fully priced in one rate rise in a year’s time.
The central bank is readying a series of macro-prudential tools, which include forcing banks to increase their reserves for certain types of lending, requiring bigger housing deposits, and capital buffers, prompting a move to tighten lending rules for major banks.