What the RBA can learn from the RBNZ

Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler has done it again; defying expectations to intervene in a market to overcome a problem he couldn’t fix with conventional monetary policy.

Fresh from creating a macro-prudential tool to restrict the growth of riskier mortgage lending, Wheeler this week confirmed that he had intervened in the currency market to push the New Zealand dollar down.

The central bank quietly confirmed on Monday that it sold a net $NZ521 million worth of the currency in August and had bolstered its foreign exchange intervention capacity by $NZ938 million to $NZ9.558 billion.

The confirmation followed a detailed “final, final warning” statement from Wheeler last Thursday, that explained why the New Zealand dollar was extremely and unjustifiably high and why intervention was being considered.

Even so, the confirmation surprised many in the market who had become inured to the Governor’s many warnings about the currency and his previous apparent ambivalence about intervention.

The New Zealand dollar fell more than a cent on the news and has fallen more than four cents to around US78c since Wheeler’s final warning last week.

It’s still early days, but Wheeler’s second big intervention in his two years as Governor appears to have been effective.

The Reserve Bank of New Zealand has faced many of the same problems faced by the Reserve Bank of Australia (RBA) over the last year and has been one step ahead with policy innovations to deal with them.

Just as in Australia, New Zealand’s house price inflation threatened last year to gallop out of control as leveraged investors used historically low interest rates to compete for limited supplies of homes.

Yet the house price inflation has not been accompanied by the consumer price inflation that would normally trigger interest rate hikes needed to shut down the party.

Wheeler’s response in the face of much scepticism from bankers and politicians was a limit on the growth of highly leveraged mortgages.

Imposed in October last year, the bank reckons it helped reduce the pace of annual house price inflation from 10 per cent to 6 per cent and bought the RBNZ an extra three to six months of flat interest rates.

The central bank has since increased its Official Cash Rate by 100 basis points to 3.5 per cent, taking more steam out of the housing market, but also increasing pressure on the New Zealand dollar.

The currency’s surprising strength this year despite slumps in dairy and log prices has been a constant source of frustration for New Zealand’s policy makers, just as it has been for RBA Governor Glenn Stevens.

Wheeler warned about the high New Zealand dollar 13 times in the last two years, but was circumspect about the benefits of intervention for most of that time.

As recently as March, Wheeler pointed out that the New Zealand dollar was between the 7th and 10th most traded in the world, with turnover of $NZ100 billion a day – most of which was in offshore markets.

See more at: https://bluenotes.anz.com/posts/2014/10/what-the-rba-can-learn-from-the-rbnz/#sthash.mMJ1uYgc.dpuf

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