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New Zealand needs policies to address private sector savings and to raise economic flexibility in order to address it overvalued currency, a senior Reserve Bank of New Zealand (RBNZ) official said Friday.
"The nominal exchange rate is currently at historically high levels against nearly all of our trading partners. The real exchange rate -- which takes into account relative inflation rates and so is a better measure of overall competitiveness -- is also at historically high levels," RBNZ assistant governor and head of economics John McDermott said in a published speech to the country 's farming industry group.
Much of the New Zealand dollar's current strength could be explained by factors such as the country's current high terms of trade, especially dairy prices, and relatively strong economic performance.
"The high exchange rate is contributing to economic imbalances and the Reserve Bank would like to see it lower in order to promote more sustainable economic growth," said McDermott.
"Whether the exchange rate is overvalued from a long-term perspective relates to the effects it has on real economic outcomes. For instance, an overvalued exchange rate will affect the tradable sector's profitability and its decisions about investment, employment and market strategy."
Commentators had provided a range of suggestions to correct the overvaluation problem, including keeping interest rates low, currency intervention, quantitative easing, capping the exchange rate and changing the focus of monetary policy to target the exchange rate.
"Many of these suggestions are unlikely to have a significant lasting effect on competitiveness, or would have unpalatable trade- offs such as much higher inflation, or are simply not feasible," he said.
