19 Sep 2012

Time to do something about dollar - strategist

9:58 am on 19 September 2012

The Reserve Bank needs to bring down the high exchange rate for the New Zealand dollar and the Government should inject money into the ailing productive sector or risk further damage to the economy, a money markets strategist says.

JBWere strategist Bernard Doyle says the threat of closure at Solid Energy's Spring Creek coal mine on the West Coast and retrenchments in the manufacturing sector highlight deeper issues for the New Zealand economy.

He says it is time for policy-makers to break the rules and lean against the high New Zealand dollar, which has exchange rates at the mercy of outside forces.

The Government and the Reserve Bank have ruled out intervention, but Mr Doyle says the world has changed and the New Zealand authorities are now too passive.

"If you came out and said 10 years ago that in 2012 the Federal Reserve would be printing money, the Swiss National Bank would have a hard cap on their currency - manipulating their currency - and the EU would be pulling out any tricks they had to keep the euro in one piece, people would have said you're dreaming.

"But this is the world we live in. We live in an environment where massive central bank intervention is now a regular occurrence, as is quite significant government intervention in the private sector."

Bernard Doyle says the Reserve Bank needs to follow other central banks and bend the rules to lower the dollar and help save the productive sector.

"I think the most realistic and most pressing area for New Zealand is perhaps some mix of trying to cut interest rates to take the pressure off the currency, some form of structured intervention into the dollar and some form of limits on the extent to which house borrowing and house price appreciation can take place.

"I think it is important that New Zealand is just not a passenger in all of these powerful force that are keeping our dollar higher, keeping our interest rates low, keeping our current account heading into deficit and closing part of the economy that I don't think should be closed."

The Government could also follow the example of its Tasmanian counterpart, which gave a grant to the Norske Skog mill in Tasmania to expand.