Reserve Bank governor Graeme Wheeler has reiterated that his two biggest challenges are the over-valued currency and the housing market, in the 2013 annual report, which shows the central bank made a dividend payment of $175 million in the latest financial year.
"The two most significant challenges facing the bank at present are the overvalued New Zealand dollar and overvalued housing market," Wheeler said in his preamble to the report.
Wheeler has had to weigh up a bubbling property market's potential to fuel debt-driven consumer spending if households feel wealthier, against the dampening effect of an over-valued kiwi dollar on the price of imports. The New Zealand dollar recently traded at 82.81 US cents from 82.52 cents yesterday.
The strong kiwi dollar has been undermining local exporters and made imported substitutions cheaper, while keeping a lid on tradable inflation by reducing importers' costs, he said.
At the same time, rapidly increasing house prices, particularly in Auckland and Christchurch, are posing a risk to the country's financial stability if they were to turn around sharply, something that could come when interest rates rise next year.
Because of that tension, Wheeler announced restrictions on low-equity mortgage lending will come into effect next week in an attempt to cool the housing market without the need to raise interest rates.
A major challenge for the wider economy will come from the country's ability to meet both the $40 billion reconstruction effort in Canterbury and the escalating house-building programme in Auckland, Wheeler said.
"The bank will closely monitor this shift and strive to ensure that the relative price increases needed to redirect resources to these ends do not spill over into generalised inflation pressures and threaten the bank's price stability objectives," he said.
Wheeler got the support of the Reserve Bank's board in their review of the financial year, with outgoing chairman Arthur Grimes and his deputy Sue Sheldon saying the governor "maintained momentum both in terms of the bank's policy developments and its internal processes."
The Reserve Bank reported a net profit of $308 million in the 12 months ended June 30 from $118 million a year earlier, on gains in the value of its foreign exchange holdings and financial instruments.
The board recommended a dividend payment of $175 million to the government, up from $160 million in 2012. The bank typically distributes gains in foreign exchange rates only when they've been realised.
As at June 30, the Reserve Bank had lifted its foreign exchange intervention capacity to $9.1 billion from $8.92 billion a year earlier. That was down to $9.04 billion as at July 31, and the bank will release figures for currency flows in August later today.