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RBNZ Ready to Intervene - Wheeler (Bloomberg)

Posted by Akhilesh Ganti on May 29, 2013 6:45:00 PM

(from Bloomberg)

Tracy Withers

May 30 (Bloomberg) -- New Zealand’s central bank is prepared to increase currency sales to combat a “significantly overvalued” exchange rate, Governor Graeme Wheeler said. “In recent months we have undertaken foreign exchange transactions to try and dampen some of the spikes in the exchange rate,” Wheeler said in emailed notes of a speech in Auckland today. “We are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence.”

Wheeler has kept the benchmark interest rate at a record-low 2.5 percent to help take pressure off the currency, which is the second-strongest in the past year among the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The central bank is reluctant to cut borrowing costs because that may stoke a housing boom and fan inflation, Wheeler said.

New Zealand’s dollar pared its gains after the comments. It bought 81.04 U.S. cents at 9:20 a.m. in Wellington from 81.29 cents before the statement was released. Wheeler on May 8 said the central bank had been intervening in the currency, the first time since June 2007 it had publicly commented on currency action. It will publish figures for April currency sales later today. “We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi” he said today.

One-Way Bet

New Zealand’s currency has gained 7.5 percent the past year, second to the Swedish krona, according to the Bloomberg indexes. It rose to 86.76 cents on April 11, the highest since August 2011, and has declined in recent weeks amidst speculation the Federal Reserve may remove some monetary stimulus. “New Zealand’s exchange rate is significantly overvalued,” Wheeler said. “Fortunately it has retreated a little in recent weeks with a stronger U.S. dollar.”

The central bank is concerned about the scale of housing lending and the proportion of high loan-to-value lending, which are loans made in excess of 80 percent of the property value, Wheeler said. House prices in April rose at the fastest annual pace since 2007, according to industry reports this month. “Risks associated with excessive housing demand could normally be constrained by raising official interest rates and letting them feed through into higher mortgage costs,” he said. “However, this would carry significant risks of a further strengthening in the exchange rate.”

Bank Lending

The central bank this month agreed with the government on how to use new policies that may influence bank lending. The so-called macro-prudential tools include changes to bank balance sheets and limits on the volume of high loan-to-value transactions. The new policies will add to the cost of bank funding, may help to reduce the supply of mortgage lending and, in some cases, curb the housing market, Wheeler said. “If house price pressures abated, it would increase the possibility that the cash rate could remain at its current level for longer than through this year,” he said. “If housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the cash rate.”

 

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