The New Zealand dollar has dropped to its lowest level compared to the US dollar since 2009.
The New Zealand dollar was trading at just over 56 US cents and 87 Australian cents on Tuesday morning, having fallen in value by 19% against both currencies over the past year.
Although there has been a gradual downward drift over the year, that accelerated during the past few days.
Essentially this means importing from the US is now much more expensive than it was. Travelling overseas is also very pricey.
But he appeared to indicate the risk of higher imported inflation would not throw New Zealand’s monetary policy off course, describing its own cycle of monetary policy tightening as “well advanced” and “very mature”.
Speaking at an event hosted by the Council of Trade Unions in Wellington, Orr said the economy was in a “very strong position” relative to most other countries.
Orr noted that US Federal Reserve chairman Jerome Powell signalled last week that the central bank would continue to tighten US interest rates “at pace” in order to tame inflation, which was last measured there at an annual rate of 8.3% in August.
“What does that mean? It means US interest rates are up. That makes a ‘capital drain’ from the rest of the world back to the US as money flows to where the highest yield is.
“It also creates broader economic uncertainty that generates volatility and concern that again reinforces the desire for people to have their capital back in the US as opposed to the rest of the world,” Orr said.
Almost every currency in the world was declining against the US dollar as the US sought “along with the rest of us” to fight inflation, Orr said.
“It is just that they matter more on the way through.”
Orr said that New Zealand was positioned better than most countries, bar Japan and China, on the “misery index” plotting inflation and unemployment rates.
Inflation was running at 15% to 20% in Europe east of Germany and 10% to 15% in western Europe, he said.
“And a lot of those inflation rates are still continuing to rise, not decline.”
We’ve come through this extremely well. That doesn’t mean 7.3% inflation is acceptable. No, it’s not,” Orr said.
But the global situation gave “some perspective”, he said.
Orr said the Reserve Bank had been “noisy” about the moves it had made to tackle inflation through higher interest rates and its end to quantitative easing “because the more people have low inflation expectations, the easier it is to achieve low inflation expectations”.
“We believe we still have some work to do. But the good news is because we’ve done so much already, the tightening cycle is very mature. It’s well advanced,” he said.