You are not permitted to download, save or email this image. Visit image gallery to purchase the image.
Reserve Bank Governor Graeme Wheeler stepped up his rhetoric today about the twin dilemmas facing the economy - a high exchange rate and an over-heated property market.
Reserve Bank data showed the Reserve Bank had sold a net $256 million worth of New Zealand dollars in the month of April, which one economist said was "peanuts" compared with the US27 billion in Kiwi dollars that trade every day.
The selling of Kiwi dollars by the Reserve Bank in recent months was seen as passive intervention aimed at sending a subtle signal to the markets.
Wheeler, in a speech to the Auckland Institute of Directors, said the bank had undertaken foreign exchange transactions to try to dampen some of the spikes in the exchange rate.
"But we're also realistic. We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi," Wheeler said.
But he added: "We are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence."
Unlike the passive intervention of the last few months, overt or direct intervention is usually conducted through the major banks at about the same time, on a large scale, and followed up the same day with an official statement.
The bank's recent actions have involved relatively small amounts, which have only come to light through the bank's monthly statistical releases.
ASB Bank chief economist Nick Tuffley said the central bank was in a dilemma. "The exchange rate is pulling them in one direction and the housing market is pulling them in the other," he said.
"And possibly, when the ducks line up - they may well do some direct intervention and that would at least take some of the pressure off the currency," he said. "To try and rectify one problem with interest rates will only make the other worse, so that's the challenge," Tuffley said.
The New Zealand dollar eased after Wheeler's comments to under US81c but then regained ground to finish at US81.15c.
The Kiwi has been the third strongest performing currency against the US dollar after the Mexican peso and Swedish krona over the past 12 months. The New Zealand dollar's trade-weighted index hit a post-float high of 79.7 last month, which has put pressure on the export sector.
Wheeler said the bank was concerned that the current escalation of house prices was increasing the probability of a sharp fall in house prices, which could pose a risk to the financial system.
Earlier this month, following a review of the major banks' housing risk models, the Reserve Bank raised the risk weights applying to all current and new high loan-to-value ratio housing loans.
Wheeler said loan-to-value ratio limits can help reduce the incidence of credit booms and decrease the probability of financial distress and low growth following the boom.
Imre Speizer, senior currency strategist at Westpac, said Wheeler had "talked up" the macro prudential tools that could be used to tackle the housing market, which implied that the official cash rate of 2.5 per cent could remain at that level for longer than was previously expected.