Reserve Bank of New Zealand Governor Graeme Wheeler on Thursday hinted at further foreign exchange intervention to stem excess gains in New Zealand dollar and suggested that the Official Cash Rate can be reduced if inflation risk looks significantly low.
"In recent months we have undertaken foreign exchange transactions to try and dampen some of the spikes in the exchange rate," Wheeler said in a speech to the Auckland Institute of Directors. "We are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence," he said.
"New Zealand's exchange rate is significantly overvalued" though it has retreated a little in recent weeks due a stronger US dollar, he said. According to Wheeler, investors seemed undeterred by the country's over-valued currency, sizable current account deficit and high private sector external indebtedness.
Despite heavy capital inflows and strong currency, the central bank has been reluctant to lower the cash rate mainly due to concerns about housing boom and higher inflationary pressures. "If housing pressures are much less of a concern and the exchange rate continues to appreciate and the inflation risk looks low, it may create opportunities to lower the OCR," the governor said.
Earlier this month, the RBNZ signed an agreement with the Finance Ministry that awarded more powers to the central bank to curb excessive growth in credit and asset prices in the country through the use of four macro-prudential tools.
Justifying the central bank's current monetary policy stance of keeping the OCR at record low, Wheeler said today that raising the interest rate to constrain excessive housing demand would carry significant risks of a further strengthening in the exchange rate.
At the same time, the policymaker said, continued appreciation of New Zealand dollar will put further downward pressure on tradable goods prices and this may, in turn, push CPI inflation further below the 1-3 percent target range.
He said both the exchange rate and the housing market present difficult challenges for monetary policy when both the currency and asset prices appear to be overvalued and investor demand is expected to remain strong.
While macro-prudential measures can be useful in helping to restrain housing pressures, "they are no panacea," Wheeler pointed out. New Zealand need to enhance productivity in the construction sector, free up land supply, and examine related tax issues to rein in such pressures, he said.
The approvals for new houses, including apartments, increased 19 percent to 1,755 in April, Statistics New Zealand said Thursday. This was the highest number since April 2008.
According to a report from the Real Estate Institute of New Zealand released earlier this month, house prices increased 7 percent year-on-year to NZ$390,500 in April. However, prices fell 2.4 percent from NZ$400,000 in March.
The International Monetary Fund has called for tighter monetary policy if strong house price inflation and credit growth adds to inflationary pressures.
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