The dollar dilemma

The high exchange rate was acting as drag on the NZ economy, Bollard said, but “if this persists, it is likely to reduce the need for further OCR increases in the short term”.

That was one of the ‘ifs” that will determine when Bollard tightens monetary policy and raises the OCR. On the one hand, the economy has grown more vigorously than the RBNZ expected, supported by strong terms of trade. But global financial markets are fragile, including the uncertainty around the US government’s debt ceiling. This continues to highlight the downside risk to trading partner activity noted in his previous month’s statement, Bollard said.

And while annual headline CPI inflation continues to be above the bank’s 1–3% target band, Bollard said wage and price setters should focus on underlying inflation, estimated at below 2.5%.

Finance Minister Bill English can also see some positive aspects to the currency’s strength. He said this week its rise shows global investors have confidence in the NZ economy, which was being seen as something of “a safe haven”.

But BERL economists, in their monthly review of the economy for clients, said the NZ dollar was being pushed in direction “that is diametrically opposed to what is needed to rebalance the New Zealand economy” and encourage its long-term development. BERL examined the influences on the currency’s strength and concluded they pointed “to fundamental market failure of the exchange rate setting mechanism”.

Financial commentator Alex Tarrant wasn’t convinced by talk of safe haven either, although he expects the NZ dollar will stay high for while. “Everyone loves Australia at the moment and all this talk of New Zealand being new ‘safe-haven’ is because our economy is so entwined with our Tasman cousin.”

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