Reserve Bank governor Alan Bollard last week described New Zealand's economic recovery as "tepid", saying it was at risk from the high kiwi dollar.
In the bank's twice-yearly Financial Stability Report, released on Wednesday, Dr Bollard said a sustained rebalancing of the economy towards the tradeable (export) sector would be difficult as long as the kiwi remained relatively high, flirting with US80c at times.
That is also the view of economist Alan Beckenstein, Professor of Business Administration at Darden Graduate School at the University of Virginia, who visited Auckland earlier this month to give a keynote address at the University of Auckland and to promote the annual executive programme Darden runs in New Zealand.
Dr Beckenstein, a regular visitor to New Zealand since 1994, says the kiwi, and its volatility, is a bubble created by high housing values, low private savings and current account deficits. Our current dilemma – whether to rejig exchange rate policy and rethink the openness of our capital markets – has its genesis in the Asian crisis of 1997-98, and the dotcom bust of 2000, which led to recession in 2001-02.
"The housing bubble led to very real high interest rates which led to very high yields compared with the rest of the world, which led to the carry trade bringing money into New Zealand, converting it into New Zealand dollars and bidding the exchange rate up," he says. "So the exchange rate goes high, largely because of housing-induced monetary policy to prevent the system becoming too inflationary."
The kiwi is one of the world's 12 most-traded currencies. "So you're a playground for the carry trade. You're in a bubble economy and it's housing, combined with a low savings rate, that has done it."
Should the Christchurch City Council sell some of its assets?Related story: Council asset sales mooted to help raise $900m