Reserve Bank powerless in currency fight, says Key

Checking the strength of the New Zealand dollar is not something the Reserve Bank has the power to do, says Prime Minister John Key. Photo / Mark Mitchell

Prime Minister John Key says New Zealand and its central bank are effectively powerless when it comes to checking the strength of our currency and the damage it is doing to some areas of the export economy.

This morning Labour leader Phil Goff said the Government needed to act on the dollar which has been approaching the US80c mark in recent days.

"Clearly the dollar is at such a high level that it's helping to destroy manufacturing industry in this country at the moment. "We have to take that seriously and I would expect the Government with its army of bureaucrats to have some answers. So far we've seen none."

Goff said Reserve Bank had limited powers to intervene in the currency market, "but they do have them and can choose to exercise them".

However Key pointed out the officials his Government has to advise them on currency matters were the same as those available to the previous Labour Government.

Moreover, there was no great mystery as to what was driving the New Zealand dollar.

"It is the weakness of the US economy and the desire to see the US dollar depreciate, that is quite clear through the actions of the Federal Reserve in the US."

In recent days the US Federal Reserve had engaged in a second round of so called "Quantitative Easing" essentially increasing the amount of US dollars in circulation causing them to lose value.

Key said New Zealand could respond by adopting exchange rate controls.

"My view is yes, you can do that but it's not at no cost and those imbalances have to show up elsewhere in the economy, either through more pressure on interest rates, higher inflation and less access to capital."

Moreover, Key said that if the Reserve Bank had followed the lead of its counterparts in Australia, Switzerland, or Japan and intervened in currency markets to drive down the exchange rate it would have sustained large losses.

"New Zealand would be significantly under water."

Ultimately, the decision whether to intervene in currency markets was for the Reserve Bank and its Governor Alan Bollard.

While Bollard - due to the Reserve Bank's statutory independence from the government - could "do whatever he likes" when it came to currency intervention, "I suspect he's probably formed the same view that I have", said Key.

While New Zealand had long suffered from "currency swings" which he acknowledged were "very uncomfortable", the current relative strength of our currency was not without its benefits such as limiting petrol price increases.