The New Zealand dollar will stay at an elevated level for longer than previously thought as the local economic story finds favour with foreign investors, according to the Reserve Bank.
The trade-weighted index, a measure of the kiwi against a basket of five currencies, averaged 78.18 in the March quarter, ahead of the Reserve Bank's December projection of 77.4 in the period, as the prospect of rising interest rates and accelerating economic momentum fuel demand for the New Zealand dollar.
The bank now anticipates the currency will remain elevated over its projection through to March 2017, "depreciating only gradually," according to today's monetary policy statement. The bank sees the TWI averaging 78.4 in the current March quarter, falling to 78 next year and 76.6 in March 2015. The TWI was at 79.61 following the statement.
"Investors have recognised the positives for New Zealand's outlook in the forms of the high terms of trade and domestic growth momentum," the MPS said. "The consequent expectation of rising interest rate differentials has been priced into the yield curve ... which is also reflected in the current level of the exchange rate."
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Governor Graeme Wheeler has tried to talk down the currency, calling it a headwind on the tradable sector, and today said the bank doesn't "believe the current level of the exchange rate is sustainable in the long run."
Revisions to the way gross domestic product is measured showed higher terms of trade and net export volumes than previously thought, which explains some of the persistent strength in the kiwi dollar, though the "high exchange rate is expected to remain a drag on economic output over the projection," the bank said.
While the strong currency eats into export earnings, it also keeps down the price of imports, and the bank expects tradable inflation to remain negative for much of its projected period through to March 2017.