Largely sabre-rattling" and "potentially dangerous" are among the reactions from economists to comments by Reserve Bank Governor Alan Bollard yesterday which hint at a willingness to cut the official cash rate if the exchange rate remains stubbornly strong.
"The New Zealand dollar has stayed elevated despite recent falls in commodity prices," Bollard said, in a statement which as expected left the official cash rate unchanged at 2.5 per cent.
"Should the exchange rate remain strong, without anything else changing, the bank would need to reassess the outlook for monetary policy settings."
Six weeks ago he said sustained strength in the New Zealand dollar would reduce the need for future increases in the OCR. That accompanied forecasts which pencilled in hardly any increase in the OCR - just 25 basis points a year for the next three years.
Since then the kiwi dollar has not budged despite, as the governor pointed out yesterday, further falls in export commodity prices.
In New Zealand dollar terms those prices have fallen by 18 per cent over the past year - even before the latest Fonterra auction at which dairy prices dropped with a thud - but the exchange rate has shrugged it off.
The shift in the bank's language yesterday could be seen, not just as venting frustration at a level of the dollar which is hampering the economy's rebalancing to growth led by exporters rather than consumers, but as indicating a willingness to cut the OCR in the hope it might take pressure off the exchange rate.
"We consider this to be largely sabre rattling," ANZ chief economist Cameron Bagrie said.
It would risk reigniting the housing market. The floating mortgage rate is already at a 47-year low and prices are rising, especially in Auckland.
The kiwi was not being driven by domestic factors, he said, but "by other countries' debasement of their currencies. That's something New Zealand can't control."
And the Australian dollar had barely responded to a massive downward shift in interest rate expectations there, Bagrie said.
Bank of New Zealand economist Craig Ebert said it could backfire on the Reserve Bank.
"To the extent FX traders think Bollard is being drawn into providing more juice to the economy than is justified, via lower lows in local interest rates, then they might well be inclined to envisage further upside in the New Zealand dollar, as the Reserve Bank has to reverse tack on account of the domestic inflation pressure it is inviting."
It had happened in the last cycle, when the markets continued to bid the kiwi dollar higher on the perception - correct as it turned out - that the bank was behind the curve, that is, underestimating the inflationary risks.
Westpac chief economist Dominick Stephens also doubts cutting interest rates would be effective in tackling the high exchange rate and says it could even be counter-productive.
But he would not rule it out, citing the precedent of Norway. "[Its] central bank has twice cut rates in response to its strong exchange rate, even as house prices continue to climb and private sector debt is forecast to reach an eye-watering 200 per cent of disposable income this year."
As for the possibility of direct intervention in the foreign exchange market, the bank set out in 2004 the conditions under which it would consider it. The exchange rate has to be exceptionally high and at levels unjustified by economic fundamentals. Intervention would not attempt to influence the long-term trend of the exchange rate, but rather to shave the peak off the cycle if the bank believed a turning point was near.
It would have to have to be consistent with its inflation-targeting mandate. The difficulty there is that a high dollar is one of the reasons inflation is near the middle of the bank's target range.
And there must be "a material prospect of influencing the exchange rate, and in ways that seek to avoid destabilising speculation".
Ebert said when the world's central banks were trying to suppress their own currencies it would be a bold move for any small central bank, of a comparatively robust economy, to try to row against that tide.