Sunday 29 April 2012

Reserve Bank intervention in the exchange rate: Is there a point?

From the TVNZ website we learn that,
The New Zealand dollar has been labelled so unjustifiably high that there is now speculation the Reserve Bank could intervene to bring it down.
What exactly does "unjustifiably high" mean? And I can't help but think that Bill English has a point when he says,
Finance Minister Bill English said the Reserve Bank is too small to have much impact.

"They don't have much capacity to change the exchange rate so they've got to be careful how they use that."
Even if the RB can lower the exchange rate, it can't so it forever. At best it could have a temporary effect and you have to ask if that is true then what is the point? Also if they do lower the exchange rate this puts upward pressure on inflation which the RB is there to control. Thus lowering the exchange rate runs counter to the RB's reason for being.

There is also the question of whether our exchange rate is "high" or other countries exchange rates are "low". In particular given the size of the U.S. current account deficit a lower U.S. dollar is to be expected.

Now it maybe argued that we have to lower the exchange rate because our exporters are in trouble. But as I have argued before it is importing that makes us better off and thus why are we so worried about exporting? All seems a bit too mercantilist for me.

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