And lowering the OCR on a sustained basis in a manner inconsistent with the PTA would result in higher inflation and a weaker exchange rate. "Eventually inflation would increase costs and erode competitiveness, and lead to expectations of higher inflation."
Sacrifices to future growth would eventually be needed to cure the inflation problem.
What about intervening in the foreign exchange market?
The bank would do that , Wheeler said, "when circumstances are right".
"We want investors to know that the Kiwi is not a one way bet."
But the bank's policy is only to intervene to smooth the peaks off the exchange rate cycle and only when market conditions mean intervention would make a difference. Right now the markets are dominated by the effects of massive quantitative easing (QE) by countries worst hit by the global financial crisis.
How about quantitative easing or printing money here, then?
New Zealand did not experience the kind of severe economic damage suffered by countries which have resorted to QE, Wheeler said.
"Quantitative easing, together with its precursor of very low interest rates, is not justified in the New Zealand situation. Our economic challenges are different from the US, the euro area, and Japan, and quantitative easing would increase inflation, raise inflation expectations, stimulate asset prices, and lead eventually to higher interest rates."
Trying to cap the New Zealand dollar in the Swiss manner would also amount to QE, on a massive scale, and be highly inflationary in the New Zealand context, he said.
As for broadening Reserve Bank's objectives, it is already required under the PTA to look at activity as well as inflation and seek to avoid unnecessary instability in output.
The economy faces an overvalued exchange rate and an overheating housing market, especially in Auckland, Wheeler said.
Macro-prudential tools being developed to address the latter "could be helpful in in alleviating pressure on the exchange rate at the margin."
