Reserve Bank 'jawboning' misses the mark, say economists

Alan Bollard / Photo Mark Mitchell

The outcome of Reserve Bank Governor Alan Bollard's bid to stop a worrying rise in interest rates by issuing a statement last week failed to impress ANZ economists.

Bollard took the rare step of issuing an unscheduled statement on Wednesday expressing his concern at a recent rise in long term wholesale interest rates.

He reiterated that the Reserve Bank was projecting interest rates to remain at relatively low levels for an extended period.

In its Market Focus newsletter today, ANZ said the comments had initially gained policy traction, with the two-year swap rate trading down to 3.65 per cent and the New Zealand dollar falling 1-1/2c against the greenback.

But "by the close of the week such loosening had pretty well been eroded".

"While we can be quick to surmise that such jawboning can have a limited shelf life, the reality is that NZ is simply being caught in the rip of wider global forces and trends, particularly in so far as the currency is concerned," ANZ said.

The ANZ economists see a need for the NZ dollar to fall, with a weaker currency being a prerequisite for any sustained economic improvement and recovery.

The currency was the critical shock absorber that must adjust, they said.

Fiscal policy was somewhat constrained in its ability to provide additional counter-cyclical support, while monetary policy was losing traction as borrowing rates were being determined by aggressive competition for deposits.

"Dr Bollard has fired a salvo at the tightening monetary conditions and missed badly, with the market listening for only 24 hours," the they said.

ANZ forecast that the NZ dollar would fall to somewhere midway between US40c and US50c, although today it said that forecast was under review.

- NZPA