Reserve Bank of New Zealand Governor Graeme Wheeler said Wednesday that the central bank has intervened in the forex market to weaken the "overvalued" currency. Kiwi made a large downside move upon the governor's remarks before Parliament's select committee.
"There has been intervention," he told the committee. Wheeler also indicated that the central bank stands ready to intervene again, if needed. RBNZ last intervened in the currency market in mid-2007.
The kiwi declined to 0.8361 against the US dollar for the first time since April 23. Further collapse of the kiwi-greenback pair will take it to the lowest level reached on April 1.
Though no details of the intervention were given, Deputy Governor Grant Spencer told the committee that the depth of the market operation "will become evident" after the central bank publishes the balance sheet data at the end of the month. The data will reflect the central bank's March quarter transactions.
"The relative strength of the New Zealand economy, in a period where the global outlook is quite uncertain, has pushed the New Zealand dollar (NZD) to new highs that will be problematic for some firms that compete in international markets," RBNZ said in its Financial Stability Report published today.
Global sentiment is also contributing to New Zealand's overvalued exchange rate, Wheeler said in a statement accompanying the report.
The intervention may not materially change the exchange rate, although could potentially take the top off rallies, he told lawmakers.
At the same time, the central bank has become increasingly worried about the momentum being built in the country's property markets. Presenting the report, Wheeler said "housing pressures are increasing risk in the financial system."
"House prices relative to disposable incomes are already high by international standards. Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," he added.
He noted that housing pressures, arising from pent-up demand, limited supply and the lowest interest rates in 50 years are being felt particularly in Auckland and Christchurch, where supply constraints are greatest.
According to Wheeler, demand is being underpinned by easier credit conditions, both in terms of lower mortgage rates and an increased willingness by banks to lend at high loan-to-value ratios (LVRs).
Meanwhile, Spencer said that the central bank want to ensure that bank capital requirements adequately reflect the risks around housing lending.
"The increase in the risk weights, applying to all current and new high LVR loans for the major banks, will result in an average increase in capital held for housing of around 12 percent and will take effect from 30 September 2013," he added.
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