Reserve Bank governor Alan Bollard has fired a shot across the bows of the foreign exchange market, warning that if the exchange rate remains strong, without anything else changing, he would need to reassess the outlook for monetary policy settings.
The comment came in the release of the bank's officialcash rate review which, as universally expected, left it on hold at its all-time low of 2.5 per cent.
Six weeks ago he said that sustained strength in the New Zealand dollar would reduce the need for future increase 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 points out today, recent 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.
This morning's rhetoric about reassessing the outlook for monetary policy setting, should the dollar remain stubbornly high, turns up the volume and hints at more than dropping the gentle tightening the bank has pencilled in.
It is liable, and probably intended, to be read as leaving the door open to cuts.
But this will have no effect unless the threat is seen as credible.
And the problem there lies in another assertion in the this morning's statement, that "Inflation ... is expected to stay near the middle of the bank's target range".
Because he goes on to point to increased housing market activity and a recovery in building activity, which will only strengthen as the rebuilding of Christchurch gets under way in earnest.
The bank is officially sanguine, at this point, about the inflationary risks from those two things but both have proven to be hot-beds of inflation in the past.
Knowing this, the markets may well shrug off this morning's jawboning as empty talk.
