By BRIAN FALLOW economics editor
The Reserve Bank wants to be able to intervene in the currency market by selling or buying dollars if the exchange rate gets too high or low.
Since the dollar floated 20 years ago the bank has never tried to influence the exchange rate in that way. Its current policy is that it would intervene only if the dollar went into freefall.
Between its most recent low in November 2000 and its high last month the dollar rose 81 per cent against the United States dollar.
Governor Alan Bollard, after announcing his decision to leave interest rates on hold, said yesterday that the bank was seeking the capacity to intervene if the dollar was "exceptionally and unjustifiably" high or low.
When the dollar was a long way from levels justified by economic fundamentals intervention could have some impact. "But it is not a major impact."
It was an option the bank should have in its toolbox.
"We are talking about the capacity to intervene in the event we should be faced with extreme and unusual values in the New Zealand dollar. We are not necessarily talking about it [intervention] at the levels of the New Zealand dollar currently."
Dr Bollard was careful not to give any numbers which would indicate where "exceptional and unjustifiable' or "extreme and unusual" levels might be.
Finance Minister Michael Cullen said yesterday that he supported the change and would recommend it to the Cabinet.
It would require a change in the bank's funding arrangement, which needs to be ratified by Parliament.
New Zealand First and the Greens said they would support it.
But National's associate finance spokesman John Key said it would prove about as effective as a popgun in a bank robbery.
Mr Key, a former global head of foreign exchange for US investment bank Merrill Lynch, said: "It will attract more speculative money into New Zealand as they seek to test the bank."
The amount of money the bank would have to play with was tiny compared with others in a market which, worldwide, has a daily turnover of around $US1.5 trillion. Act said the proposal was madness.
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