KEY POINTS:
The Reserve Bank says it continues to reserve the right to intervene directly in the foreign exchange market, but has signalled it will adopt more moderate strategies in future.
The central bank said today it would hold some of its foreign reserve holdings on an unhedged basis, building them up by selling and buying in New Zealand dollars rather than overseas currencies.
The "more passive" approach would not necessarily affect the exchange rate, but it might send a discouraging signal to speculators, RB governor Allan Bollard said.
Westpac currency strategist Michael Gordon said the move was more in line with the gradual, less visible selling of the dollar that the RB admires in Australia.
"People won't have to worry day to day whether the Reserve Bank's going to come in and sell it at a certain hour of the day, hopefully."
Mr Gordon said he did not think the Reserve Bank was backing down from its recent strong interventionist stance.
"But it is unfortunate from a PR (public relations) perspective . I think they really should have made this change before they started intervening ."
Central banks hold reserves of foreign exchange in case of a financial crisis.
Typically, the Australian central bank has sold its own currency when it is high to boost reserves, and would theoretically buy Australian dollars if the currency fell too far.
Mr Gordon said this had arguably gone some way to evening out the volatility of the Australian dollar, which like its kiwi cousin is running hot.
Here, the Reserve Bank agreed the new approach would provide a "more effective" means of responding to any sharp falls in the New Zealand dollar.
RB governor Alan Bollard said today's move was a change from policy that had been held for 20 years.
Previously the bank had matched its foreign currency assets with foreign currency borrowings, "an unusual approach by international standards".
Now the bank was moving towards "a more conventional approach".
With a portion of the reserves no longer borrowed from abroad, "we will become less dependent on international capital markets in times of crisis".
The use of unhedged reserves would also be less costly and give rise to less risk.
Mr Gordon said the big question was whether the bank would be "selling more dollars in total," given that it now would be selling dollars to accumulate reserves as well as send a signal.
He thought it would not.
"When they established their intervention policy, they set out these criteria for when intervention would be effective.
"They're pretty tough criteria so I think when [the central bank was] actually intervening in June they hadn't really fulfilled all of them, and so, not surprisingly, it wasn't terribly successful.
"I think the change of approach they've announced today means they've got a reason to sell kiwi even without considering these criteria."
A "big bang" intervention on top of that would be very well considered, he said.
- NZPA
