Charismatic

How exactly does he intend to “peg” the currency? It costs a lot to peg a currency and we would have to give up a lot of control over our currency. As a country we’re net importers anyway, we do better when our currency is stronger.

Most currency pegs fail in the end anyway because they are ill conceived folly. If we wanted to use currency as a tool to increase our ability to export a monitoring band system would be far more appropriate. It’s not a silver bullet though because you’re effectively making everyone poorer so you can export more goods abroad (so it’s not going to give people a better quality of life).

drrobert

Please consider the following:
- New Zealand is the 123rd most populous nation
- New Zealand has the 52nd largest GDP of any nation
- However, the NZ dollar is the 12th most highly traded currency!

The amount of Forex funds flowing in and out of the NZ dollar far exceeds RBNZ currency reserves. RBNZ therefore has no hope of being able to control the medium/long term value of the NZ dollar through open market operations, and they know this!

I don't think Winston Peters is proposing a currency peg (he's utterly mad if he is), but he could be suggesting capital controls. Capital controls are mechanisms of reducing the funds flowing into the country from overseas. I think Brazil is planning to control fund inflows by implementing a tax on foreign bond investments. NZ will be very reluctant to follow Brazil's example, as NZ banks and businesses rely heavily on foreign investment.

There are several other ways in which the government/RBNZ can effectively lower the kiwi dollar. These are all ways of reducing interest rates by holding down inflation. I think all of the following tactics are being implemented at present:

1. Openly or tacitly raise the inflation target (this allows for lower interest rates than otherwise)
2. Constrain bank lending using means other than raising the official cash rate (the RBNZ is doing this by implementing something called the Core Funding Ratio)
3. Reduce price inflation by opening up markets (e.g. reducing compliance costs for businesses, forging free trade agreements)
4. Reduce wage inflation (e.g. holding down public sector pay, breaking the unions)

Again, the NZ prime minister is an ex-currency trader. He is acutely aware of the damage that a high NZ dollar can cause, but he is also well aware that NZ has limited power to prevent this. He will use the four tools above as best he can.

simonsi

Not half, remember the ERM and Black Wednesday??? UK interest rates hit completely stupid levels of 16% or thereabouts before the UK fell out and sanity was restored....

drrobert

There's an article about the strength of the NZ Dollar at interest.co.nz today. John Key and Alan Bollard explain why intervention is not an option. As I suggested above, they are actively pursuing free trade agreements as one of their strategies to keep interest rates (and therefore the NZ dollar) down.

http://www.interest.co.nz/news/pm-jo...y-intervention

zaras dad

so it aint gonna happen in the near future then

Genesis

The kiwi has screamed past 2.06. We are all saved!! The kiwi has lost lots of ground in the last day (agin the US $) and the reserve bank has said that it will not/never interfere with the value of the NZ dollar. There are waaaaaaaaaaaaaaay greater things that affect it apparently and nothing short of the reserve bank dropping the current OCR hugely will suddenly devalue the kiwi in such a way that those of us with GBPs would like it to!! We just have to sit, wait then pounce at whatever we see as a reasonable price. I am very, very lucky that I have a comfy chair to do the waiting in. Cos it's going to be a looooooooooooooooooooooooooooooooooooooong wait.

gocebe

I won't be changing any money at those rates. If I'm going to take a beating on the exchange rate I'd be better taking said beating in a country where the wages are higher and where I can start saving again.