The Reserve Bank of New Zealand (RBNZ) is uncomfortable with the level of the New Zealand dollar and longer-term fixed interest rates, economists believe.
But the question is what will it do about it other than jaw boning in its monetary policy statement on Thursday.
In a Reuters poll six
forecasters expect no change to the official cash rate of 2.5 per cent, eight expect a 25 basis cut and two expect a 50 basis point cut.
Financial markets are challenging the central bank. The NZ dollar has risen from US49c in March to US63.70c on Friday. Banks are putting up three, four and five-year fixed mortgage rates because long term interest rates are rising in wholesale markets.
ANZ economist Philip Borkin said this amounted to a tightening of monetary conditions "when things are still pretty weak".
"We do think they will be concerned about that," he said.
But ASB economists wonder what the central bank can do.
The NZ dollar is rising because the US dollar is weakening. Interest rate markets around the world are wary about a flood of government debt coming there way in the next few years and that has caused yield curves to steepen.
There is a limit to how low banks can cut deposit rates when they have to compete to attract money.
"Conventional monetary policy has limitations," ASB economists said.
"The links between the official cash rate and other interest rates is not that tight," they said.
Deutsche Bank economist Darren Gibbs said the bank would maintain a strong easing bias, due to strengthening in the NZ Dollar.
"We would be surprised if the RBNZ did not express discomfort with the NZ Dollar explicitly."
The central bank has said that it expects to keep the official cash rate at or below the current level through until the latter part of 2010.
This is a signal of a preference for easier monetary conditions.
Any attempt to shock the market with a further rate cut could ultimately be another unsuccessful attempt to drive down longer-term interest rates or, more especially, the strengthening NZ Dollar.
"We think that the bank's monetary policy stance may already be a little too easy," Deutsche Bank economists said.
- NZPA
