Today's OCR decision: More Jaw Jaw

Dr Alan Bollard

There he goes again, trying to talk down the currency.

Reserve Bank Governor Alan Bollard left the Official Cash Rate on hold again at 2.5 per cent today, but his statement was another thinly veiled attempt to force the New Zealand dollar lower.

Economists have interpreted the statement as a signal that he is more likely to cut the OCR again unless the New Zealand dollar falls. His bias towards easing is even easier than before.

Here's the key line in the statement. "The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings."

Bollard is essentially threatening to cut unless the New Zealand dollar falls. This is fighting talk from a governor who specialises in trying to jawbone foreign exchange traders, banks and consumers.

The immediate reaction would have pleased Dr Bollard. The New Zealand dollar dropped more than half a cent in the first hour after the announcement at 9am and briefly dipped below 65 USc. But will it stay there and fall further? The real test will be in London and New York tonight.

The past history suggests the currency won't stay down and the world will ignore Dr Bollard.

The New Zealand dollar has strengthened in recent months, but not necessarily because foreign investors love us more. That actually hate the US dollar more because they are worried US President Barack Obama and Federal Reserve Chairman Ben Bernanke are trying to borrow, print and spend their way out of a problem caused by too much borrowing and spending. They are worried Bernanke is deliberately devaluing the US dollar to try to reflate the US economy.

That pressure is not going to go away. It may actually get worse. This week the US Treasury is selling US$115 billion worth of bonds as part of an expected borrowing programme of US$2.6 trillon over the next couple of years. To put that into context, that is more than three times as much as the total Chinese holdings of US Treasury bonds. Overnight an auction of bonds saw weak demand from foreign central banks. China is baulking at pouring even more of its foreign reserves into an asset that could devalue.

Investors are essentially worried there simply isn't enough money in the world to finance the US budget deficit, unless the US Federal Reserve prints more money and devalues the US dollar.

That means, of course, that Dr Bollard's megaphone is having to compete with a jet plane taking off in another direction. I'd be surprised if he is heard over the noise.

- Bernard Hickey