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Monetary Policy and the exchange rate: The Kiwi that had to fly

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  • Bowden, Roger
  • Lorimer, Dawn

Abstract

June 2007 saw the first serious attempt by the Reserve Bank of New Zealand to exercise its currency intervention powers, in an attempt to put a cap on the soaring NZ dollar. Sceptics pointed out that this was inconsistent with the comfort to the foreign exchange carry trade conveyed by signals that the official cash rate would remain high or even tightened further, and intervention attempts could even perversely drive the currency higher. The problem for monetary policy has been that in an incomplete debt market, the only real channel for the official cash rate to impact on fixed rate home mortgage rates is via the indirect feedback from offshore NZ interest rates. This means that the exchange rate becomes the vector. We argue on the basis of forward interest rates that the problem is fixing itself, and from here on will only be hindered by currency intervention or further tightening signals from the central bank.

Suggested Citation

  • Bowden, Roger & Lorimer, Dawn, 2026. "Monetary Policy and the exchange rate: The Kiwi that had to fly," Working Paper Series 33474, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:33474
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/33474
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    4. Roger Bowden, 2004. "McHouse prices, capital hoovering, and real exchange rate exposures," New Zealand Economic Papers, Taylor & Francis Journals, vol. 38(1), pages 119-139.
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