Should RBNZ intervene in currency markets?

Brian Fallow wrote an interesting piece in the NZ Hearld this week. He outlined the different policy stances by both National and Labour with regard to exchange rate intervention.

*National still maintain that intervention is not a viable option to reduce the value of the NZ$. They cite the experience of the Bank of Japan in the 1990’s and their attempt to devalue its currency – the Yen went from 330 to 80 against the US$.
*Labour favour the RBNZ intervening more actively to reduce volatility of the currency as it becomes difficult for exporters to plan ahead.

The recent QE2 by the US Fed has caused the US$ to fall against all major currencies. This with the Chinese resisting moves to allow the Yuan to appreciate faster against the US$ leads to the appreciation of everyone else’s currency. If NZ embarks on a competitive devaluation to make exports more competitive, by the RBNZ selling NZ$ on markets, there will be costs:

1. The extra dollars would be inflationary
2. The weaker NZ$ would make imports more expensive which may impact on higher input costs
3. With a weak labour market firms may pass on some of cost to their workers via lower real wages.
4. With inflationoary pressure a tightening of monetary policy might be required – higher interest rates. This will attract capital inflows and increase the value of the US$.
5. This would increase Government debt which puts pressure on the taxpayer.

However it is hard to conclude that there would be no benefits from a weaker NZ$. In 2007 the RBNZ did intervene in the foreign exchange market and sold NZ$. At present it would be hard to make the case that the NZ$ is unusually high – it is still 6% lower aginst the US$ than it was in 2007.

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