The Reserve Bank Governor has admitted it has taken the rare step of intervening in the currency markets to bring down the New Zealand dollar.
Graeme Wheeler made the comments on Wednesday during a Parliamentary committee briefing for the central bank's six-monthly financial stability report.
Mr Wheeler told MPs on the Finance Committee that the New Zealand dollar is significantly overvalued and the bank had intervened in the past month to lower it.
"We would not expect, given the strength of the flows, that intervention would materially change the level of the exchange rate. But we could take potentially the tops off rallies."
Deputy governor Grant Spencer told the committee that the size of the Reserve Bank's action would show up in its monthly financial accounts.
NZ dollar down briefly
The Reserve Bank's disclosure that it had intervened in the currency market in the past month sent the currency sharply lower for a brief period.
Westpac currency strategist Imre Speizer said the bank wanted to warn the market it doesn't want the currency rising much higher from current levels.
He says on the day it had a strong signalling effect pushing the kiwi down about a cent lower, from 84.60 US cents to 83.60.
But Mr Speizer said later on Wednesday the New Zealand dollar rebounded to just over 84 cents.
House market 'risk' to financial system
Graeme Wheeler warned that a stronger housing market is putting the health of the financial system at risk.
Mr Wheeler told MPs on Wednesday that the financial system is sound, but under threat from surging house prices in Auckland and Christchurch, and household debt is rising from already high levels compared with incomes.
He said further increases in house prices would worsen the potential damage that could result from a housing downturn if there is an economic or financial shock to the country.
Mr Wheeler admits a sharp downturn in house prices is rare in New Zealand, if not in other parts of the world and the Reserve Bank is taking steps to reduce that risk by getting banks to hold more capital against their riskier loans from the end of September this year.
The central bank is also considering other tools to safeguard the health of the financial system from excessive credit or asset growth, including forcing banks to hold more cash during credit booms.