The New Zealand dollar is currently stronger than would be consistent with medium term fundamentals and "appears to be overvalued," the International Monetary Fund said in a report on Monday.
The gap between domestic and foreign interest rates, and more recently, increased portfolio flows into New Zealand are contributing to the current level of the exchange rate, the Washington-based lender said in the report.
IMF noted that if global monetary policy were to become less stimulatory, the exchange rate would likely depreciate over time. The government's deficit reduction plan also eases upward pressure on the exchange rate, it said.
The report also noted that economic growth may accelerate this year with an increase in construction activity offsetting headwinds from budget deficit reduction, the strong dollar, and the possibly protracted impact of the severe drought.
IMF also noted that the government's fiscal consolidation path strikes a balance between the need to limit both public and external debt increases while containing any adverse impact on economic growth.
Finance Minister Bill English welcomed the IMF statement and said the assessment reflects "the balanced and pragmatic approach the Government had taken with its economic program over the past four years."
IMF expects underlying inflation to increase but remain modest. Persistently high exchange rate is dampening tradable price inflation and wage pressures remains contained, the Fund said.
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