Foreign exchange intervention
Information on our approach to intervention in the foreign exchange market.
New Zealand has a floating exchange rate regime, which means that we do not maintain a specific level for the New Zealand dollar (NZD) relative to other currencies. This means that the level of the NZD should reflect the supply and demand of NZD, relative to other currencies in the world.
However, there are some rare circumstances where it may be necessary for us to intervene in the NZD foreign exchange market. These are related to 2 policy objectives:
- financial stability
- monetary policy.
Financial stability and market functioning
In rare but extreme circumstances we may be required to restore order in the foreign exchange market. This could happen in crisis situations such as:
- a big earthquake
- an outbreak of foot and mouth disease
- a global financial or economic shock.
In these situations, liquidity in the NZD exchange rate may be heavily reduced or even disappear completely. We would be prepared to support liquidity until normal conditions returned. This objective is about ensuring that the foreign exchange market continues to function in an orderly manner and essential transactions can occur. Holding foreign reserves for this objective acts as a type of insurance against a major threat to financial stability which might occur during a crisis situation.
We can also intervene in foreign exchange markets for monetary policy reasons. Intervention when the NZD is exceptionally high or low aims to smooth the extreme tops and bottoms of the NZD exchange rate cycle. These actions are uncommon and are not intended to maintain specific level of the exchange rate.
We are committed to maintaining New Zealand’s floating exchange rate regime. In some circumstances, however, the exceptional level of the exchange rate may place undue pressure on certain parts of the economy and affect inflation or employment outcomes.
Criteria for intervention
The Monetary Policy Committee looks at the following criteria when assessing possible intervention for monetary policy purposes.
- The exchange rate should be exceptionally high or low.
- The exchange rate should be unjustified by economics fundamentals.
- Intervention should be consistent with our monetary policy objectives.
- Market conditions should be opportune and allow intervention to have a reasonable chance of success.