KEY POINTS:
Right now the Reserve Bank resembles nothing so much as a set of traffic lights with the red and the green both lit up.
The financial markets are entitled to say: Make up your mind, mate.
Only last week Governor Alan Bollard raised the official cash rate for
the third time in three months and issued a set of economic forecasts heavy with the menace of more to come.
He cited a positive terms of trade shock coming at a time when there is only tentative evidence of cooling in the housing market, the seat of the domestic inflation problem.
The message was clear: No more messing about. No more benefit of the doubt. The monsoon bucket will be refilled and dumped on us as often as it takes to put the inflation fire out.
That, after all, is the only way to engineer a sustained drop in the exchange rate.
And in the few days since then we have learned that house price inflation is accelerating, and that we enjoy the best terms of trade since before the 1974 oil shock.
So in a world of carry trades the markets see a currency supported by the highest policy rates around, with a material chance of higher rates still.
And they see a commodity currency supported by the highest commodity prices in a generation. The conclusion is obvious: buy the kiwi.
But now the bank has taken the unprecedented (since 1985) step of selling the currency.
Surely that is a signal that he has finished raising the OCR?
Not necessarily, the Governor says.
In other words having sold the kiwi yesterday he may soon give people a reason to wish they had bought it.
Is it do what I say or do what I do?
He may think it is salutary to put the markets on edge, uncertain about where he is going, and to fire a warning shot that the kiwi dollar is not a one-way bet. But in the end it is via the markets that the Reserve Bank acts on the world.
They need to be able to read, and to trust, the signals the bank gives.
If they forget last Thursday's tightening and focus on Monday's currency intervention, they will conclude that interest rates are heading down now.
It could undo the effect of last week's interest rate rise and reduce pressure on the housing market, just when international interest rates are becoming supportive of what the bank has been trying to do for years now.
They call that an own goal.