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Finance Minister Michael Cullen said today the country's currency was still "a little bit" overvalued although its equilibrium level was higher than it was five years ago.
Cullen also told Reuters in an interview that the New Zealand dollar was likely to head lower than higher in the medium term.
"The dollar is still above where we might regard as normal range, equally however, most people would argue the equilibrium level of the dollar is now higher than it was 5 years ago and certainly 10 years ago," he said.
Cullen declined to specify the kiwi's equilibrium level, but said economists now see a level of around high 50 US cents to low 60 US cents.
The kiwi dollar has fallen over 7 per cent from a 23-year post float high of US81.1c in late July on risk aversion following the turmoil in the credit sector and expectations that the central bank will not lift interest rates further.
Cullen said he expected further declines in the New Zealand dollar, with any sharp fall posing an inflationary risk to the economy.
"If you look in the medium term, I think there is bigger risk that it's going to fall."
Annual inflation unexpectedly dropped to 1.8 per cent in the third quarter, data showed on Monday, but the fall was mainly due to one off factors.
Cullen said he was seeing sufficient signs of a slowdown in the housing market, but inflation remained a concern.
"Probably we're still actually towards the upper end of the (central bank) band and therefore one still has to be somewhat careful around fiscal policy," he said.
He said cuts in personal income tax rates would be contained in next year's budget but the scope had not yet been decided.
- REUTERS
