By BRIAN FALLOW
Reserve Bank Governor Don Brash says the troubles of the nation's embattled dollar may not be over, and he won't raise interest rates or intervene to prop up the currency.
The New Zealand dollar fell to 39.90USc yesterday, its lowest since it began trading freely in March 1985.
It has slumped 22 per cent against the greenback this year, making it the world's third-worst performer.
Dr Brash offered no solutions but a variety of reasons for the crisis, including the strength of the US dollar, the size of the current account deficit and concern about Government policies.
"Over the longer term the depreciation will, if sustained, encourage people and capital to move out of industries serving a primarily domestic market ... and into industries producing goods and services for export, or in competition with imports, such as agriculture, forestry, manufacturing, tourism, fishing, horticulture, viticulture, software and so on," he told the American Chamber of Commerce in New Zealand at an Auckland meeting.
Such an adjustment would help cut the current account deficit, and might well lead to somewhat faster economic growth in the medium term, he said.
But he repeated that if those made worse off by the depreciation sought compensating increases in their own incomes, "the whole process becomes much more painful."
"If we see prices, and fees, and wages and salaries beginning to suggest ongoing inflation, as distinct from the first round effects of the depreciation, the bank will tighten monetary policy."
No simple explanation existed for the dollar's fall - 44 per cent against the US dollar since its peak in November 1996.
"A significant part of the depreciation seen since early 1997 has simply been the reversal of an over-valued currency at that time and as such has been desirable," Dr Brash said.
"Another significant part of the depreciation is simply a reflection of the strength of the US dollar and as such may not continue indefinitely. "And in part we need to recognise that the depreciation is a market adjustment to our longstanding tendency to spend beyond our means, borrowing the savings of other countries to do so."
Dr Brash said he could not rule out the possibility of further depreciation.
"I do nevertheless believe that over the longer term, we will see some strengthening of the New Zealand dollar."
The dollar hardly moved, rising to 40.49USc from 40.47USc just before he started his speech.
The 10-year bond yield was unchanged at 6.77 per cent.
"There is a feeling of powerlessness. It's got fear written in it," said Geoff Mason, senior economist at Bank of New Zealand.
"The Reserve Bank is not offering any great solutions or certainty in this area," he said.
The Top 40 share index has dropped 13.1 per cent this year in New Zealand dollar terms. In US dollar terms the index has lost 32.6 per cent, making it the world's 10th worst performer.
One-year-to-three-year bonds have handed investors losses of 18.9 per cent in US dollar terms this year, making them the worst performing bonds.
"The rest of the world doesn't rate us because we're not making the returns here," Mason said.
"We're seen as old economy and not high tech or highly productive and so not offering any great returns."
The drop in the currency isn't likely to wipe out banks and companies, as it did in countries such as Indonesia and Thailand when their currencies tumbled in 1997-98.
Dr Brash said raising the Reserve Bank's key interest rate from 6.5 per cent was unlikely to help the dollar. And, while the bank had "never ruled out" buying the currency, intervention would not prop up the dollar for long.
Robin Clements, chief economist at UBS Warburg said: "The point we would make, more openly than the Reserve Bank could, is that there is only so much it and monetary policy can do."
The Reserve Bank left its benchmark interest rate unchanged after reports showed the economy contracted a greater-than-expected 0.7 per cent in the second quarter and business and consumer confidence dropped.
Australia's central bank also unexpectedly left its key rate at 6.25 per cent on Wednesday, sparking a fall in the Aussie dollar, and a flow-on fall in the Kiwi dollar.
Dr Brash said raising rates to prop up the currency was unlikely to have the desired effect.
"In the absence of inflationary pressure, financial markets recognise that higher interest rates are likely to be a temporary phenomenon.
"If the bank raised rates there's fear it would push the economy into recession."
A recession is widely defined as two quarters of contraction.
Finance Minister Michael Cullen echoed Dr Brash's view that the Reserve Bank should not intervene to help the dollar.
"As soon as any signal was uttered that at any stage the New Zealand Government may be engaged in exchange rate intervention, then that kind of happy outcome would not be reserved for terribly long."
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