Reserve Bank's Wheeler has 'open mind' on currency intervention

Reserve Bank governor Graeme Wheeler says he has an "open mind" on intervening in foreign exchange markets as the strong kiwi dollar continues to keep a lid on inflation. The currency fell on concerns it was approaching levels that might trigger a response from the central bank.

The kiwi had earlier jumped about half a USc after the Reserve Bank cut the official cash rate to 1.75% and indicated it would stay put for at least the next two years. In the monetary policy statement,

Mr Wheeler said the exchange rate was "higher than is sustainable" for balanced economic growth and needed to decline, and he later told a media briefing in Wellington that he had "an open mind on intervention." 

He declined to comment on whether the conditions for intervening – where the exchange rate is exceptionally high or low, unjustified by economic fundamentals, consistent with the policy target agreement, and market conditions allowing for a reasonable chance of success – had been met.

After his comments at the briefing, the kiwi dropped to 72.90USc from a peak of 73.58USc before the press conference, and the trade-weighted index fell to 78.60 from as high as 79.30. The Reserve Bank raised the projected track for the TWI, though still sees it gradually falling over the next three years.

"The TWI has almost dropped 75 pips, all on intervention talk," Tim Kelleher, head of institutional FX sales at ASB Institutional in Auckland, said. "The TWI above 80 is the go-zone, theoretically, for it to do something."

The Reserve Bank built up its capacity to intervene in FX markets last year, with about $10.45 billion available to try to influence the market at September 30. It last intervened in August 2014, when the TWI was near 80 and it sold a net $521 million after Wheeler had invoked the criteria needed in trying to jawbone the currency.

Today Mr Wheeler said he had considered yesterday's election of Donald Trump as US president before affirming the policy decision to cut the benchmark rate.

Polling for a surprise Trump victory spooked markets in Asia yesterday with stocks across the region slumping, though they've since recovered after a rally on Wall Street on the prospect of lower corporate taxes and looser regulation with Republicans controlling the White House, Senate and Congress.

The Reserve Bank sees the international environment as creating a number of risks to its projected track for economic growth, which is expected to start generating inflation and lift the consumers price index back within the bank's target band of 1-3% in the current quarter, before creeping up to the 2% midpoint target by December 2018.

"Numerous uncertainties remain, particularly in respect of the international outlook and policy may need to adjust accordingly," Mr Wheeler said.

With the economy growing at about an annual pace of 3.5-4.0%, outstripping potential output of 2.9%, Mr Wheeler said there should be sufficient inflation to get back within the target band and that more fiscal stimulus wasn't needed. That comes at a time when the government finds itself with a bigger pot of money than expected fuelled by a swelling population delivering a bigger tax, and in the lead-up to next year's general election, stoking speculation it will dangle a tax cut in the 2017 budget.

(BusinessDesk)