Reserve Bank governor Graeme Wheeler signalled this morning he might push back the start of increases in the official cash rate if the New Zealand dollar stays high.
The bank's review of the OCR is an almost verbatim repeat of the previous one in September.
In particular the key guidance paragraph continues to say that OCR increases are likely to required next year but how much and when "will largely depend on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures."
What is new is a heightened focus on the other horn of the bank's dilemma, the exchange rate, which as recently as last week was at record highs on a trade-weighted basis.
AdvertisementAdvertise with NZME.
"Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR," Wheeler said.
At one level this is a statement of the obvious. The bank's target is headline consumer price inflation and nearly half of the consumers price index consists of tradeable items - goods whose price is influenced by world prices and the exchange rate.
But it is also a reminder to the market that piling into the New Zealand dollar in the confident expectation of higher interest rates also at the margin weakens the case for those higher rates.
Wheeler described global long-term interest rates as still very low but also as volatile, and linked that volatility to uncertainty as to when the US Federal Reserve will exit from its policy of quantitative easing. He told the Herald last week that he does not expect that to begin until March next year.
Westpac chief economist Dominick Stephens said he now expects the Reserve Bank will begin hiking the OCR in April next year, where his previous call was March.
"We still believe the economy is going from strength to strength. But the exchange rate is now uncomfortably high, and we expect the trade-weighted index will be above 78 next March. At those levels, we doubt that the Reserve Bank will be prompted into hiking the OCR early. "