Reserve Bank no backstop for business

By BRIAN FALLOW economics editor


The Reserve Bank is emphasising that its new currency market intervention policy does not mean it will be doing businesses' hedging for them.

In a paper released yesterday, the bank said it would not seek to smooth out the day-to-day, week-to-week or even year-to-year movements in the exchange rate.

"Such volatility is clearly a nuisance, but businesses can and do deal with that by hedging their currency positions," the paper said.

"What businesses can't deal easily with are the swings over several years from extremely high to extremely low exchange rates, swings that are out of keeping with changes in the economic situation."

The kind of intervention it proposes would be limited to the extremes of the cycle, when the exchange rate was "clearly unjustifiable" in relation to the underlying economy.

It would be opportunistic, rather than a "come what may" stand in the market against the odds.

Finance Minister Michael Cullen, who has been hinting about the prospect of currency intervention since last November, has qualified these hints by expressing concerns about the "moral hazard" - that abandoning the bank's hands-off policy of the past 20 years would weaken firms' incentive to hedge against swings in the exchange rate.

Reserve Bank Governor Alan Bollard, appearing before Parliament's finance and expenditure committee yesterday, cited a comment by Fonterra chief executive Andrew Ferrier.

Ferrier said it would be good for the Reserve Bank to have this capability but that businesses should not expect that it would replace their own hedging. "I absolutely agree with him on that," said Bollard.

He also moved to correct the impression left by a comment last Thursday.

Asked then if he could think of a time in recent years when intervention might have been necessary he said: "No. We haven't taken the view that that would have been necessary, looking back in the past."

Yesterday he said: "We don't know. It's hypothetical."