By the end of the week, the New Zealand dollar and local interest rates had won something of a reprieve after the Bank of England's intervention to support the British bond market had a spillover impact on currency and debt markets around the world.
At 7.3 per cent for the June year, New Zealand inflation is well outside the Reserve Bank's target range of 1 to 3 per cent.
At current levels, the currency is much weaker than the Reserve Bank's own forecasts published on August 17, and wholesale interest rates are far higher.
A weak kiwi stimulates the economy, but it is also inflationary because it makes imports more expensive.
The central bank is likely to raise its official cash rate by half a percentage point to 3.50 per cent on Wednesday, and the expectation is that it will increase by another half a point at the release of its November 23 monetary policy statement.
Over time, a weaker currency may force the bank to tighten further because tradable, or imported, inflation is taking far longer to normalise, said Kiwibank chief economist Jarrod Kerr.
He said the Reserve Bank runs sophisticated models to arrive at its forecasts. "One of the key inputs is the currency - and the currency is now 5 or 6 per cent below where they had it in the August monetary policy statement.
"Running that through the model, your tradables inflation is running higher than would otherwise be the case, and that's a frustration for them because we have seen a decline in commodities prices and a decline in shipping costs, so we were hoping to see a quick and substantial decline in tradables inflation over next year," Kerr said.
"But it's a US dollar story and you can't really fight this.
"The Fed is fired up and on the front foot trying to get inflation down just like every other central bank is."
As it stands, the kiwi is on the wrong side of interest rate differentials, with New Zealand's 3 per cent official cash rate compared with the Fed funds rate of 3.0 to 3.25 per cent.
The kiwi tends to be strongly influenced by commodities prices and world economic growth.
"The other driver linked to that is global risk sentiment, and clearly the risk sentiment has been shattered first by central bank action, rising interest rates, and tanking equity markets," Kerr said.
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said a deteriorating world growth outlook would offset the impact of a weaker kiwi.
"If you put the two together, it's probably a bit of a wash in terms of its implications for monetary policy," Pepper said.
"From our point of view, they are working in opposite directions.
"It's fantastic that our exporters are getting higher NZ dollar prices for the things that they are selling overseas, but that global demand is now looking less strong - even from a month or so ago," he said. "It's price and volume that matters in terms of your overall export value."
Pepper doubted the kiwi's fall would prompt a re-rating of the Reserve Bank's interest rate track.
"Our own view is that there is a sufficient offset in that global economic environment to mean that it is hard to draw that conclusion that that track would necessarily be higher."
Still, the weak currency was a problem the Reserve Bank could do without.
