Bollard reiterates level of NZ dollar 'not out of bounds'

Alan Bollard. Picture / Fotopress

Reserve Bank Governor Alan Bollard today reiterated that the level of the New Zealand dollar was "not out of bounds" given historically high New Zealand export commodity prices.

The kiwi traded close to a post-float high of US74.45c in overnight trading.

Dr Bollard was today questioned by parliament's finance and expenditure committee on his decision last week to lift the official cash rate to 6.75 per cent from 6.5 per cent, which put more upward pressure on the currency.

He said that export commodity prices were at their strongest since 1972-75, although the translation into New Zealand dollars meant returns for exporters were reduced.

He conceded that raising interest rates for the seventh time in a year would affect the currency but said the Reserve Bank could really only affect monetary conditions through interest rates.

He declined to comment on several questions on whether or not the bank should intervene in the currency market to reduce the dollar's value.

Dr Bollard said the kiwi was mainly being driven by the US dollar, which was falling due to investors quitting that currency. While New Zealand had a similar proportioned current account deficit to the US deficit, financial markets were less concerned about New Zealand's shortfall because of the Government's strong budget surplus.

Despite the strong currency, most exports were holding up well, although fish, forestry and some manufacturing exporters were experiencing financial pain, he noted.

Asked after the meeting if the New Zealand dollar was over-valued or justified at its current level by the commodity prices, he said: "If you look historically at the relationship, you can see that when commodity prices are very high, the New Zealand dollar is very high and it is maintaining that relationship."

He said financial markets had reacted to last week's Monetary Policy Statement by taking at face value his comments that there was little scope to ease rates in the near future.

The bank faced a challenge to engineer a "soft landing" for the economy and there was a possibility of a harder landing. He said it was difficult, with the economy at a turning point, for the bank to get monetary policy exactly right.

Because inflation was running at the top of the bank's 0-3 per cent band, Dr Bollard said to leave rates unchanged would require a more aggressive tightening later.
Asked about the union movement's campaign for a 5 per cent wage rise, Dr Bollard, said the bank was not targeting one sector of the community. But he said people had to understand that the bank would act to keep inflation under control and the bank was concerned people did have inflationary views of what will happen in the future.

"I don't think we are going to see that kind of number broadly through the economy," he said.

Asked why New Zealand had the highest interest rates in the OECD, Dr Bollard said it reflected New Zealand's strong economic growth rate and people's desire to borrow and spend. It was partly the result of New Zealanders' "love affair with bricks and mortar".

Rates would come down when people decided they were being penalised enough to make them decide to spend less.

The level of interest rates was not enough to dampen business confidence, which was at a high level.

He expected some people on the margins to be hurt by the latest rate rise. The bank believes house prices were still rising but not as strongly as in the recent past.

- NZPA