14 Mar 2014

Exporters told to get used to high dollar

7:33 am on 14 March 2014

Reserve Bank Governor Graeme Wheeler says the country has to get used to the high New Zealand dollar.

Graeme Wheeler.

Graeme Wheeler. Photo: RBNZ

The central bank on Thursday raised the Official Cash Rate by 25 basis points to 2.75 percent.

Mr Wheeler argued rate hikes had been so well signalled that the effect on the exchange rate had already been factored in - however that didn't prove to the case.

After the announcement the Kiwi jumped more than half a cent against its American counterpart, hitting a five month high of 85.26 US cents, and continued to appreciate into the afternoon following strong jobs figures in Australia.

Mr Wheeler said high commodity prices and near zero interest rates in other developed economies means the dollar is very attractive to global investors.

Terms of trade were a major reason for the high exchange rate, while countries representing two thirds of the world's output - the G7 nations, 18 countries in the eurozone, Switzerland and Sweden - have policy rates that are still at 0 percent to 1 percent.

Mr Wheeler said returns to exporters will suffer for some time yet, because the dollar is likely to remain stubbornly high for some time.

"There are clearly negative effects in terms of headwinds in the tradable sector for exporters and import substitution industries, and particularly those exporters that are exporting to Australia and therefore manufacturing exporters."

Mr Wheeler said the New Zealand currency varies between the seventh and tenth most traded currency internationally. Daily turnover in the foreign currency markets is around $NZ100 billion, and about 90 percent of that takes place offshore. New Zealand's gross domestic product is $180 billion to $200 billion.

Futher rises

Economists are predicting a front-loading of hikes to the official cash rate as the year progresses.

The central bank is forecasting economic growth of 3.3 percent in the year to March, and a more broad based economic expansion.

It is predicting annual inflation of 1.7 percent in the March quarter, bringing it closer to the 2 percent midpoint of the bank's target range.

Mr Wheeler said increasing the OCR will keep future average inflation near that midpoint, and how far interest rates need to move will depend on how households and businesses respond to the economic environment.

At the end of January, 40 percent of mortgages were on floating rates, down from 53 percent a year earlier.

And 73 percent of mortgages are floating or at a fixed rate of less than 12 months.