N.Z.'s Brash Says Kiwi Dollar Record Decline May Continue--Recession Fears

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N.Z.'s Brash Says Kiwi Dollar Record Decline May Continue--Recession Fears

By Victoria Batchelor

Wellington, Oct. 5 (Bloomberg) -- New Zealand's central bank Governor Don Brash said the nation's embattled currency may extend its record decline and he won't raise interest rates or intervene to prop up the currency.

The New Zealand dollar fell to 39.90 U.S. cents yesterday, its lowest level since it began trading freely in March 1985. It has slumped 22 percent against the U.S. dollar this year, making it the world's third-worst performer. Brash offered no solutions and a variety of reasons for the currency crisis, including the strength in the U.S. dollar, the size of the current account deficit and concern about government policies.

``There is a feeling of powerlessness. It's got fear written in it,'' said Geoff Mason, an economist at Bank of New Zealand Ltd. ``The Reserve Bank is not offering any great solutions or certainty in this area,''

The New Zealand dollar hardly moved, rising to 40.49 U.S. cents from 40.47 U.S. cent just before he started his speech. It was recently back at 40.47 U.S. cents. The 10-year bond yield was unchanged at 6.77 percent.

Also, Brash's comments yesterday that he's prepared to raise rates to cool inflation, even if economic growth is weak, helped weigh on the domestic dollar.

Stocks Don't Appeal

``Clearly I cannot rule out the possibility that the exchange rate will fall further,'' Brash said in his speech titled: The New Zealand Dollar. Why it has Happened and What Does it Mean?'' to the American Chamber of Commerce in Auckland.

``There is no quick or easy way to reverse the recent decline in the New Zealand dollar,'' he said, calling for ``cool heads and rational thinking.''

The New Zealand Top 40 stock index has dropped 13.1 percent this year in New Zealand dollar terms. In U.S. dollar terms, investors would have lost 32.6 percent investing in the New Zealand Top 40 index this year, making it the world's 10th worst performing index.

``The rest of the world doesn't rate us because we're not making the returns here,'' Mason said. ``We're seen as old economy and not high tech or highly productive and so not offering any great returns.''

Still, the drop in the currency isn't likely to wipe out banks and companies, such as it did in Asian countries like Indonesia and Thailand when their currencies tumbled in 1997-98.

No Foreign Debt

New Zealand's government has no net foreign-currency- denominated debt, and Statistics New Zealand estimates 97 percent of all overseas liabilities owed by New Zealand banks and companies is hedged against declines in the currency.

Brash said raising the Reserve Bank's key interest rate from 6.5 percent is unlikely to help support the New Zealand dollar. And, while the central bank has ``never ruled out'' buying the currency, it's unlikely intervention would prop up the dollar for long.

The central bank left its benchmark interest rate unchanged yesterday, in line with expectations, after reports showed the economy contracted a greater-than-expected 0.7 percent in the second quarter and business and consumer confidence dropped. Australia's central bank also unexpectedly left its key rate at 6.25 percent yesterday, which sparked a fall in the Aussie dollar, and a flow-on fall in the Kiwi dollar.

Brash said raising rates to prop up the currency is unlikely to have the desired effect. ``In the absence of inflationary pressure, financial markets recognize that higher interest rates are likely to be a temporary phenomenon,'' he said.

Recession Fear

If the bank raised rates there's fear it would push the economy into recession. A recession is widely defined as two quarters of contraction.

``In a sense, Brash's comments were more relaxed than yesterday. He's not going to raise rates to prop up the currency and that's good for economic growth,'' BNZ's Mason said.

Brash said he hasn't ruled out intervention to prop up the ailing dollar by buying the currency with some of the bank's foreign exchange reserves, though it isn't likely to have to support it.

``So far, at least, we have not been persuaded that such intervention would be likely to have any large or lasting benefit,'' Brash said

``Exaggerated claims that the fall can be pinned on just one thing -- whatever that one thing might be -- are almost certainly wrong and are unhelpful in improving our understanding of the implications,'' he said.

``At this time, we need cool heads and rational thinking, not extravagant claims or counter-claims,'' Brash said. ``I do believe that over the longer term we will see some strengthening of the New Zealand dollar.''

The central bank's next review is Dec. 6, when it releases its quarterly monetary policy statement, which includes a comprehensive update of its view of the economic outlook. Six of 14 analysts expect the bank to raise rates a quarter point then, according to a Bloomberg News survey. Two expect a half-point increase.

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-- Carl Jenkins (Somewherepress@aol.com), October 05, 2000


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