Response to Reserve Bank Governor Press Release

The Reserve Bank Governor, Dr Alan Bollard says that the recent rise in the value of the Kiwi$ against the US$ might not last.

"However, some recent financial market developments, especially the recent upward pressure on the New Zealand dollar, are working against this rebalancing. If markets are buying the New Zealand dollar on the expectation of a strong recovery they may end up being disappointed." Press release 17th June 2009.

Yet most agree that the recent rise in the value of the US$ was caused by a flight to safety. Investor pulled their money out of companies and other countries due to fears caused by the recession. And It would be hard to argue that all those investors were attracted to the US economy for any other reason. The US economy is hardly impressive today, in terms of security, profitability or good management.

So what happens when those fears subside? Surely the logical response is for investors to seek to strike a better balance between risk and reward, and surely this must lead to a flow of cash away from the US$. There can be no recovery if this does not happen.

The decline in value of the US$ will be an early sign of recovery. And if the US$ goes down the Kiwi$ must rise unless something else happens. What else could happen?

The non-management of the Kiwi$ has been a staple of NZ economic policy for nearly 25 years. In my view, the volatility of the Kiwi$ has wiped out the majority of the benefits of otherwise sound economic policies. But this is not the Reserve Bank's view, so no change is expected.

The only lever Mr Bollard has is interest rates. As these rise so does the Kiwi$. Interest rates are historically low, and must rise over the next year or two if NZ is to get the funds it needs.

So what will stop the rise in the Kiwi$? Beats me. Ask Alan.

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Brian Arps is a small business management consultant, specialising in in-house accounting and management systems. He is an accomplished public speaker and debater, and writes poetry for fun. He has been a political organiser for both Labour and Act. He is now politically independent.

ENDS

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