Kelly Eckhold: Why the RBNZ's increased foreign currency intervention capacity makes sense

<p>Although trading in foreign exchange markets is inherently very risky, the Reserve Bank (RBNZ) boosting its capacity to do so makes sense both from monetary policy and financial stability perspectives, Westpac New Zealand Chief Economist Kelly Eckhold says.</p><p>Speaking in in the latest episode of interest.co.nz's <a href="https://www.interest.co.nz/of-interest-podcasts" target="_blank"><i><strong>Of Interest podcast</strong></i></a><i><strong>, </strong></i>Eckhold whoformerly worked as the RBNZ's manager of foreign reserves and at the International Monetary Fund, says the RBNZ's foreign currency intervention capacity is likely to increase significantly over the next two or three years from the NZ$17.725 billion as of its latest disclosure.</p><p>That's even after the RBNZ in July<a href="https://www.interest.co.nz/currencies/124195/reserve-bank-bolsters-currency-intervention-war-chest-robertson-lines-capital" target="_blank"><strong> ramped up</strong></a> its foreign currency intervention capacity by almost NZ$4 billion by creating and selling NZ dollars. This followed <a href="https://www.interest.co.nz/public-policy/119370/reserve-bank-and-finance-minister-have-agreed-new-framework-managing-foreign" target="_blank"><strong>January's announcement </strong></a>of its new Foreign Reserves Management and Co-ordination Framework (FRCF).</p><p>Eckhold points out the RBNZ's total level of foreign reserves hadn't changed substantively since 2008, and the economy's about 80% bigger now and the foreign exchange market has probably doubled in size.</p><p>"When you see this rather large and abrupt change in the level of reserves going on here it's a consequence of the fact that the framework hasn't been reviewed for a very long time," Eckhold says.</p><p>"We have a well functioning foreign exchange market. The purpose of having the intervention policy for crisis situations is to keep it that way at all times," he says.</p><p>From a monetary policy perspective the RBNZ may intervene when the NZ dollar "overshoots or