IMF urges RBNZ to use existing framework
(20 March 2013 – New Zealand) The International Monetary Fund (IMF) has warned New Zealand against messing with the existing monetary policy framework to bring the Kiwi dollar down slightly.
'We strongly feel the framework for monetary policy, including a flexible exchange rate, has been one of the reasons New Zealand is in a relatively resilient position, compared with some other countries,' Bruce Aitken, who headed the IMF team which has been giving the economy its annual check-up over the past two weeks, said on Monday.
'Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path.'
Aitken estimated the dollar was overvalued by about 15 percent, 'though it is difficult to put a precise figure on it'.
It was likely to remain high as long as global monetary policy stayed very loose, he said, and how long that would be depended on recovery in the United States and, more problematically, in Europe.
'It won't be the next year or two, but there's a lot of uncertainty about it,' he said.
Unlike several countries, The Reserve Bank of New Zealand (RBNZ) has scope to cut interest rates if it were sideswiped by another major shock, and that should be the first line of defence before departing from a path of fiscal consolidation.
'As evident during the global financial crisis, the free-floating New Zealand dollar provides an additional cushion against external shocks, including disruptions to offshore funding and negative terms of trade shocks, with widespread hedging by banks and businesses insulating their balance sheets from fluctuations in the exchange rate,' the IMF's statement, said.
The IMF backed moves to equip the RBNZ with macro-prudential tools to fight a build-up of systemic risk from rapid house-price inflation and credit growth.
Aitken said there was not a lot of experience of the use of such measures in advanced economies and they should be used infrequently and with caution, and not be seen as a routine management tool.
'Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path.'
Aitken estimated the dollar was overvalued by about 15 percent, 'though it is difficult to put a precise figure on it'.
It was likely to remain high as long as global monetary policy stayed very loose, he said, and how long that would be depended on recovery in the United States and, more problematically, in Europe.
'It won't be the next year or two, but there's a lot of uncertainty about it,' he said.
Unlike several countries, The Reserve Bank of New Zealand (RBNZ) has scope to cut interest rates if it were sideswiped by another major shock, and that should be the first line of defence before departing from a path of fiscal consolidation.
'As evident during the global financial crisis, the free-floating New Zealand dollar provides an additional cushion against external shocks, including disruptions to offshore funding and negative terms of trade shocks, with widespread hedging by banks and businesses insulating their balance sheets from fluctuations in the exchange rate,' the IMF's statement, said.
The IMF backed moves to equip the RBNZ with macro-prudential tools to fight a build-up of systemic risk from rapid house-price inflation and credit growth.
Aitken said there was not a lot of experience of the use of such measures in advanced economies and they should be used infrequently and with caution, and not be seen as a routine management tool.
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