Finance Minister Bill English gives more reasons why meddling with the exchange rate isn’t a good idea:
A Reserve Bank paper published earlier this year looks at interventions by the Bank of Japan and the Swiss National Bank and their relevance to New Zealand. It notes that economic conditions are quite different in New Zealand from Japan and Switzerland. Both of them have experienced deflation recently, partly due to their strong currency appreciation. New Zealand has not. New Zealand has in fact experienced an increase in its terms of trade, contributing to upwards pressure on the exchange rate. Switzerland and Japan have been forced to attempt to lower their currencies in order to ease monetary conditions. In New Zealand we could just lower interest rates if we want to ease monetary conditions.
John Hayes: What specific lessons can New Zealand draw from the results of currency market interventions by Switzerland and Japan?
Hon BILL ENGLISH: The Reserve Bank paper confirms that the currency market interventions are expensive and they do not have a lasting impact. They note that currency interventions since 2008 have largely resulted in financial losses for the Swiss National Bank and the Bank of Japan, and they have been ineffective in lowering their currencies. Since the beginning of 2008, despite the efforts of the Swiss bank to keep their currency down, it has actually appreciated 27 percent against the euro and 15 percent against the US dollar. In Japan the yen has appreciated 29 percent against the US dollar and 37 percent against the euro.
New Zealand’s economy is much smaller than Japan’s and Switzerland’s.
They might be able to afford the losses which came from meddling but we can’t and if it didn’t work for them it certainly won’t work for us.