The economy is probably in its fifth quarter of recession and the Royal Bank of Canada thinks the New Zealand central bank may have to resort to foreign-exchange intervention.
As well as lowering business costs, direct convertibility may pave the way for New Zealand's central bank to diversify some of its foreign-exchange assets into Chinese government bonds.
WSJ: New Zealand, China in Talks on Convertibility of Currencies
For example, in New Zealand, the central bank governor's job and rumored bonus are dependent on achieving numerical inflation targets, which are set by policy-makers in a transparent process.
New Zealand's central bank said Wednesday it intervened in foreign-exchange markets to blunt the rise of its currency and will continue to do so, a day after Australia's central bank cut interest rates to a record low and noted the stubborn strength of the Australian dollar.
WSJ: Asian Governments Take Measures to Battle Strong Currencies
New Zealand also boasts an independent central bank committed to price stability and a government budget that has been in surplus for the past five years.
In New Zealand, for example, the central bank has lowered interest rates more than five percentage points but the local currency is still appreciating.
In New Zealand, the head of the central bank said the bank has intervened in currency markets to slow the appreciation of its currency, but admitted there was only so much it could do.
WSJ: Asian Governments Take Measures to Battle Strong Currencies
In nearby New Zealand, the head of the central bank said the bank has intervened in currency markets to slow the appreciation of its currency, but admitted there was only so much it could do.
WSJ: Asian Governments Take Measures to Battle Strong Currencies
The finance minister, Michael Cullen, wanted New Zealand to follow the more relaxed strategy of Australia's central bank.
An increasing number of central banks, such as the Bank of England, the European Central Bank and the Reserve Banks of Australia and New Zealand, now support the view that monetary policy should sometimes act to restrain a rapid increase in credit and asset prices.
ECONOMIST: Yesterday's financial architecture needs refurbishing
In New Zealand, whose currency is a favorite trade of yen carry-traders, the central bank raised rates for the fourth time this year on Thursday, to 8.25, but signaled it was probably done with its tightening.
None of the big New Zealand banks currently meets the new threshold, and because longer-term borrowing is dearer, the central bank expects lending costs to increase by 10-20 basis points.
No need: an independent central bank committed to price stability can hold inflation down while ignoring gold witness Germany or New Zealand.
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