The Reserve Bank might intervene and sell currency if the
New Zealand dollar remains high while export prices continue to
weaken, governor Graeme Wheeler says.
The dollar slipped yesterday as Mr Wheeler made a speech on
the dairy industry to DairyNZ's Farmers Forum in Hamilton,
falling as low as US86.95c from US87.41c. It finished trading
The bank considered New Zealand's exchange rate was
overvalued and did not believe its current level was
sustainable, Mr Wheeler said.
It could weaken if the United States economy continued to
improve, global dairy prices continued to come off their
recent highs, China's growth slowed, financial market
volatility began to rise, or there was a global ''risk off''
event such as a correction in global equity prices.
If the exchange rate remained strong, it was likely to be
reflected in continued low or negative tradeables inflation.
''In such circumstances, the high exchange rate, along with
new economic data, will be a factor in our assessment of the
extent and speed with which the official cash rate needs to
be raised,'' Mr Wheeler said.
If the currency remained high in the face of ''worsening
fundamentals'', such as a continued weakening in export
prices, it would become more opportune for the Reserve Bank
to intervene in the currency market to sell New Zealand
dollars, he said.
The dairy industry was experiencing prosperous times and the
future looked bright, but there were important challenges to
manage, Mr Wheeler said.
They included oscillations in global dairy prices, the
competition farmers would increasingly face from other
international suppliers, and the need to continue
diversifying New Zealand's export markets and positioning for
the ''enormous'' longer-term opportunities expected to emerge
in the Indian market.
Farmers should be conscious that high dairy prices could turn
around quickly, and needed to continue managing their cash
flows and borrowings prudently, he said.
Dairy debt had almost trebled over the past decade and stood
at $32 billion.
It was concentrated among a small proportion of highly
leveraged farms with about half held by only 10% of dairy
farmers, he said.
ASB economist Nick Tuffley said intervention in the currency
market would have its challenges.
The Reserve Bank was in the midst of a tightening cycle, with
a widespread expectation of another 150-200 basis points of
official cash rate increases yet to come.
Any attempts at intervention would be ''fighting the
underlying interest rate story'' notwithstanding the Reserve
Bank's observation that the interest rate cycle was fully
priced in and that some analysts believed there was
considerable down side risk to the New Zealand dollar, Mr
Westpac senior economist Anne Boniface said the Reserve Bank
sounded ''fairly sanguine'' on debt in the dairy industry.
Its view was that dairy farmers were taking a cautious
approach in the current cycle, and that farm credit growth
That might mean the bank was less likely to apply LVR
(loan-to-value ratio) type restrictions, which have been
applied to mortgage lending, to the farm sector, Ms Boniface