exchange rate being higher than is currently the case. the bank does intervene in the foreign exchange market from time - to - time. but evidence from the past, here and elsewhere, suggests foreign currency intervention is unlikely to have a sustained impact in lowering the exchange rate. 7 this is because daily foreign currency transactions in new zealand dollars swamp any practical intervention capacity, averaging around $ 100 billion per day with more than 80 percent of the transactions taking place offshore. at best the reserve bank can attempt to smooth the peaks and troughs of the exchange rate. of course, reasonable people can differ on what is the appropriate scale of intervention used to smooth some of the volatility. but the old economic saying that there is no free lunch still applies : the greater the scale of intervention, the greater the financial risk carried by the tax payer. more active macro - prudential policy has been undertaken recently to help reduce the buildup in systemic risk in the banking sector resulting from imbalances in the housing sector. the current low interest rates, although appropriate for the current inflationary environment, are contributing to those financial stability risks. in such circumstances one might consider using monetary policy more aggressively to lean against house prices. 8 while this would mean inflation would take longer to rise to the mid - point of the target band it would reduce the risk of a future crash in the housing market. however, using monetary policy to reduce the financial stability risks of a booming housing market would put additional upward pressure on the exchange rate. instead, we have used macro - prudential policy, in particular the loan - to - value ratio limits, to help moderate the risks in the housing market. this addresses the financial stability issue more directly and reduces the need for monetary policy to put pressure on interest rates and the exchange rate. what, other than monetary policy, will remedy the real exchange rate? saying there is little monetary policy can do about the exchange rate, is not the same as saying there is little that can be done. the reserve bank undertakes a great deal of research and analysis on the exchange rate. one example of this research was an exchange rate forum jointly hosted by the reserve bank of new zealand and the treasury earlier in the see http : / / www. rbnz. govt. nz / research _ and _ publications / speeches / 2013 / 5150125. html. chetwin, w and a munro ( 2013 ) “ contemporary exchange rate regimes : floating, fixed and hybrid ” paper presented to

, laeven and suarez ( 2017 ), jimenez, ongena, peydro and saurina ( 2014 ), and caballero, hoshi and kashyap ( 2008 ). figure 5 : economic activity in new zealand and australia in the inflation targeting era source : haver analytics, rbnz calculations. note : the data has been normalised to 100 in 1990 q1. in addition to the disruptions in the global economic environment, the new zealand economy is occasionally affected by weather - related shocks, such as droughts, that constrain the agricultural sector. in the past, we have also suffered severe damage to our infrastructure due to earthquakes. so when the bank sets monetary and financial stability policy, it needs to balance concerns about these different - and sometimes conflicting - domestic and international influences. figure 6 : the terms of trade in new zealand and australia in the inflation targeting era source : haver analytics, rbnz calculations. note : the data has been normalised to 100 in 1990 q1. mortgage lending in new zealand is dominated by floating and short one to two - year fixed rate mortgages ( figure 7 ). this implies that the changes in the domestic policy rate and international bank funding market rates pass through to the effective mortgage rates relatively quickly, and influence the demand for housing and house prices in new zealand. figure 7 : time to re - price on housing loans in new zealand source : rbnz bank balance sheet survey, rbnz standard statistical return, rbnz calculations. when interest rates are low, households can accommodate a higher level of debt for given incomes ; though they remain susceptible to adverse macroeconomic shocks. 3 for example, if bank funding costs escalate due to distressed offshore funding markets, lending rates in new zealand would rise, and households may find it hard to service debt. on another front, elevated dairy prices encouraged investment in dairy farms, leading to high debt levels in the agricultural sector. it ’ s worth noting that agricultural debt in new zealand has increased from $ 5 billion in 1990 to $ 63 billion today. two thirds of this debt is owed by dairy farms. if new zealand ’ s agricultural export revenue fell due to a weakening of global see also the australian case in ellis and littrell ( 2017 ). demand or a domestic drought, the contraction of economic activity in that sector could spill over to lower income and spending in the household sector, thereby increasing debt defaults. that ’ s why maintaining financial stability in