Investing.com - A weaker New Zealand dollar would be consistent with current economic conditions, Reserve Bank of New Zealand Bank Governor Graeme Wheeler said Wednesday in a speech on monetary policy, dismissing predictions for large declines in interest rates because that would be consistent with the economy moving into recession.
"Our models suggest that the real exchange rate is currently in the vicinity of its long-run equilibrium value - if growth, inflation, and the terms of trade were at their long-run trends. However, the exchange rate remains above the level consistent with current economic conditions and, in particular, the current low level of export prices," Wheeler said in a speech delivered to ExportNZ in Tauranga, New Zealand.
The current account deficit level is expected to become larger over the next two years based on recent New Zealand dollar level and terms of trade, he said.
"At current levels of export prices, a more substantial exchange rate depreciation is therefore required to stabilise the net external liabilities position relative to GDP," he said.
On monetary policy, Wheeler repeated what the RBNZ said in the Official Cash Rate statement last week when rates were cut 25 basis points to 3%.
"To maintain growth around potential and return CPI inflation to its medium-term target level, some further monetary policy easing is likely to be required," he said.
He said the RBNZ is conscious of the impact of low interest rates on housing demand and the potential for it to feed into higher house price inflation.
The RBNZ continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices, Wheeler said he expects macro-prudential policy to be helpful in reducing some of the pressure from Auckland housing market.