Roger J Kerr says Governor Wheeler will be criticised no matter what he decides, but the high currency is doing more damage than inflation

 By Roger J Kerr

Focus this week for the interest rate markets will be the particular words and phrases Governor Wheeler chooses to use in his short statement that will accompany the OCR review on Wednesday.

It would be a major surprise if the Governor cut the OCR to influence the NZ dollar currency downwards, as his previous speeches have indicated that an interest rate cut would not necessarily force the Kiwi dollar down.

Although the March MPS mentioned that interest rate reductions were an option for the RBNZ if the currency remained strong.

The Kiwi has certainly remained strong with the TWI hitting post-float highs of 79 last week.

Following Deputy Governor Grant Spencer’s comments last week about the inflationary threats from the housing market, it would be even more of a surprise if the Governor cut rates a week later and fuelled the property boom further with resultant lower mortgage lending rates.

If the Governor does defy all odds and makes a cut this Wednesday, the banks may be justified in not passing that decrease on to borrowers as they are not sure what the upcoming macro-prudential credit control measures from the RBNZ will mean for their lending and funding books.

If the Governor believed such a scenario might unfold into reality, he could back up his recent jawboning down of the currency with action that does not involved punting taxpayer’s money that intervening directly in the FX markets would involve.

Whatever stance or position the Governor takes he will be criticised, therefore saying and doing nothing is probably his safest option.

Right now the over-valued currency is doing more damage to the overall economy than potential inflationary pressures from the wealth effect coming from an over-heated residential property market.

There is not very good historical evidence that inflation increases in New Zealand come from the consumer demand side forcing prices upwards.

Increases in inflation always come from the supply side and mostly from non-competitive parts of the economy.

The saviour for Governor Wheeler should be a lower NZD/USD over coming weeks and months due to stronger USD generally and associated lower global commodity prices. 

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com