20 Mar 2014

Trade Weighted Index out of date?

8:01 am on 20 March 2014

An economist says the measure the Reserve Bank uses to weigh up the strength of the New Zealand dollar against the country's major trading partners, the Trade Weighted Index (TWI), is out of date.

The central bank's TWI measures five currencies; the US and Australian dollars, the euro, the British pound and the yen.

It does not, however, take account of New Zealand's biggest trade partner China or other Asian countries.

The Reserve Bank does have a larger currency index which includes China. The bank says it will not be reviewing the TWI until its regular annual review in December.

That's despite the agreement between the New Zealand and Chinese governments allowing direct trading between the two currencies from Wednesday.

New Zealand Institute of Economic Research principal economist Shamubeel Eaquab says many economists use the TWI to understand the impact of the exchange rate on the economy.

He says the TWI is a powerful measure because it is the summary measure of the New Zealand dollar and when it moves up or down that has big implications in terms of people's decisions to import or export.

"A very accurate basket that reflects our true trading position is absolutely vital so that we make the right decisions and take the right signals from the movement of the currency."

Mr Eaquab says New Zealand's composition of exports has changed so rapidly over the last decade, it's important this is incorporated.