New Zealand's central bank is to get a NZ$1 billion ($650 million) capital injection as part of its plan to cope with the high flying currency, while the country's foreign exchange reserves will be increased by another NZ$1.9 billion, Finance Minister Michael Cullen said on Tuesday.
Earlier this month the Reserve Bank of New Zealand (RBNZ) asked the government for the capacity to intervene in foreign exchange markets at times when the New Zealand dollar reached extreme and unjustifiable levels.
The cash injection would allow the RBNZ to cover any losses incurred during intervention, Cullen said.
The increased foreign exchange reserves are earmarked for use only at times of crisis when markets are "dysfunctional". "These measures should assist the economy by tempering exchange rate volatility," Cullen said in a statement.
In a letter to Cullen from the RBNZ, released at the same time, the bank repeated its approach to intervention.
This included entering markets only at times when the kiwi was at extreme levels not justified by economic fundamentals; intervening when there is a real chance of influencing the market; not targeting any particular level of the dollar and, not going against the long term trend of the exchange rate.
The New Zealand dollar was unmoved, sitting within its opening narrow range around $0.6510.
Deutsche Bank chief economist Ulf Schoefisch said the latest release added little to what was already known.
"We believe that the ongoing implications for foreign exchange markets will be relatively minor," he said.
The central bank has said several times since it unveiled its proposals that any intervention would be opportunistic and look only to trim the highs and lows of the exchange cycle.
The New Zealand dollar, known as the kiwi, has risen about 19 percent against the US dollar over the past year, largely driven by the greenback's slide and New Zealand's 425 basis point interest rate advantage.
The RBNZ's overall foreign currency position would be limited, governor Alan Bollard said in the letter.
Over the medium term the bank would aim to maintain, on average, a net zero open foreign exchange position, and it would get out of the market when the exchange rate was not at "exceptional levels" and when they could "avoid influencing the exchange rate".
New Zealand's overall foreign exchange reserves currently stand at NZ$5.1 billion, including Debt Management Office holdings and International Monetary Fund special drawing rights. The RBNZ's capital would be increased through raising its investment in government bonds.
The planned NZ$1.9 billion increase in foreign currency assets would be done over a four year period to lessen any impact on markets.
Cullen said a motion needed to ratify a change to the RBNZ's funding agreement has been introduced into the 120 seat parliament, where it has majority support.
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