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RBNZ responds to currency concerns

Date 24 January 2003
Time 1.00 pm

RBNZ responds to currency concerns

The Reserve Bank today explained how exchange rate movements impact on monetary policy. This follows calls from exporters for the Reserve Bank to consider their needs when making interest-rate decisions.

Speaking to the Canterbury Employers' Chamber of Commerce, Reserve Bank Governor Alan Bollard said that the Reserve Bank acknowledged the concerns of exporters in the face of the rising exchange rate, especially relative to the Australian dollar, and the speed and unpredictability of that appreciation.

Explaining the currency appreciation, Dr Bollard said "Our economy has performed very well - indeed, surprisingly well in the last year or so. New Zealand is one of the few developed countries where economic forecasts were revised up last year. Amid a rather gloomy world outlook, investors have been attracted to favourable growth surprises. And * it was a year when solid, secure, fixed-income returns seemed to come back into focus among the investor community.

"Validly or otherwise, markets have taken the view that the New Zealand economy is growing more robustly than Australia's at present," and "For investors, the US "miracle" has turned sour. * When the US is no longer flavour of the decade, there was only one way for the US dollar to go."

On how exchange rate movements affect monetary policy decisions, Dr Bollard said the Bank was required to deliver price stability and to avoid unnecessary instability in output, interest rates and the exchange rate, though achieving this was not simple.

"Sometimes, an OCR rise will exacerbate pressure on the exchange rate, but rises in both will be a necessary response to pressures on output and inflation. At other times, there will be scope for trade-offs, but there are rarely easy or reliable ones."

Commenting on the interest rate decision earlier this week, Dr Bollard said the appreciating exchange rate, if sustained, would dampen economic activity, though at the same time "Domestic spending appears to have been more robust than we had anticipated - that means that the economy has still been growing strongly."

Dr Bollard said that the Reserve Bank would be looking closely "for evidence that points to reduced pressure on resources and medium-term inflation. If that evidence emerges, and if the exchange rate remains at around current levels, or even rises further, there may be scope for a cut in the OCR later in the year."


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