I have for some time been predicting that the exchange rate will have as much effect on the Reserve Bank’s OCR increases as will the growth rate of the New Zealand economy and yesterday we saw confirmation of that from the Governor and some local economists.
The RB would love to be able to hike the OCR relatively aggressively to slow the housing market and protect against inflation in an economy that is clearly growing relatively strongly.
The problem they have though is that our major trading partners have a combination of continuing sluggish economies as well as no sign of any need to increase their own domestic interest rates any time soon.
That means that any OCR increase here widens the gap between our interest rates and those of our trading partners making it more attractive to invest in New Zealand dollars thereby putting upward pressure on the exchange rate.
That puts pressure on exporters and given that our major exporters of dairy products have seen some quite significant reduction in prices of late I would not be at all surprised to see no change to the OCR at the next review and a much more modest programme of increases over the rest of the year.
The RB would love to be able to hike the OCR relatively aggressively to slow the housing market and protect against inflation in an economy that is clearly growing relatively strongly.
The problem they have though is that our major trading partners have a combination of continuing sluggish economies as well as no sign of any need to increase their own domestic interest rates any time soon.
That means that any OCR increase here widens the gap between our interest rates and those of our trading partners making it more attractive to invest in New Zealand dollars thereby putting upward pressure on the exchange rate.
That puts pressure on exporters and given that our major exporters of dairy products have seen some quite significant reduction in prices of late I would not be at all surprised to see no change to the OCR at the next review and a much more modest programme of increases over the rest of the year.
