Bollard: Options limited on kiwi

Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard has poured cold water on suggestions the bank should intervene in the foreign exchange market to aid exporters.

Appearing before Parliament's finance and expenditure select committee Bollard was asked by Labour's finance spokesman David Cunliffe about what options he had when major economies were competing to drive their exchange rates down with the effect that the New Zealand dollar appreciated.

Bollard said the banks options were quite limited, beyond its core functions of delivering price stability and financial stability. Part of the exchange rate's strength was driven by very strong commodity prices.

In terms of intervening in the foreign exchange market: "The times we feel we can be effective are when we are around the peak or trough of the cycle and also when the exchange rate setting may be fundamentally driven by domestic policy distortions."

By contrast, "what we are seeing is a war of giants".

He questioned how long the impact of currency intervention would last and pointed to the balance sheet risk open or unhedged foreign exchange positions imposed on central banks.

Both the Bank of Japan and the Swiss National Bank earlier in the year had intervened "in quite major ways" but the initial impact had generally faded. "It is hard now looking back on those exchange rates to see the effect of those interventions," Bollard said.

"And at the minute the Swiss National Bank is looking at very large losses on its balance sheet as a result."

Cunliffe said the Reserve Bank had intervened selectively in the past to impose costs and risks on speculators.

"Well, that's true," Bollard said. "The difficulty with doing it to make speculators scared is you have to act in an irrational way and that will end up making other people scared, other than speculators," he said.

The committee's chairman, Craig Foss, asked if he had any idea how much the bank would need to sell to get the dollar down to, say, US60c.

"No," Bollard said and deputy governor Grant Spencer added: "It would be a very large amount and even then it would only achieve it temporarily."

Asked by Greens co-leader Russel Norman about Brazilian moves to tax capital inflows it blames for pushing its currency up, Bollard said the bank did not have powers to do that.

"It would end up with a lot of distortions and a lot of funds moving in and around in ways that would be quite detrimental."