Over-Valued NZD Prevents RBNZ from Raising Interest Rates

The New Zealand dollar fell yesterday and extended the decline today as the head of the central bank said that concerns about over-valued currency prevent the bank from raising interest rates.
Graeme Wheeler, Reserve Bank of New Zealand Governor, said yesterday:

Our exchange rate is over-valued relative to what would be sustainable long-term in the absence of sizeable increases in our terms of trade and productivity.

Earlier, he was talking about possibility of higher borrowing costs and mentioned in yesterday’s speech that rising housing prices might indeed warrant an interest rate hike in the future. Yet the Governor also said that “this is not the case at present”. Wheeler added:

Furthermore, with policy rates remaining very low in the major economies, and falling in Australia, any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.

Such comments suggested that the RBNZ is not ready to bolster rates and does not want stronger currency. This is not a good sign for the New Zealand dollar.
NZD/USD fell from 0.7975 to 0.7924 and NZD/JPY dropped from 77.57 to 77.05 as of 3:27 GMT today.

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