By Brian Fallow
Between the lines
With interest rates for 90-day wholesale money threatening 5 per cent, banks' margins on floating rate home loans are being squeezed.
And now a new danger has emerged.
Just as we were getting used to the idea that Reserve Bank governor Don Brash will raise the official cash rate (OCR) on November 17, some of the young men in white shirts in dealing rooms are convincing themselves that he will move on September 29, the next scheduled review of the OCR.
Surely not.
It is only three weeks ago that the majority of market economists were saying that the bank would not need to move before March next year. The hawkishness of the August 18 monetary policy statement came as surprise.
What is fuelling speculation now about a September 29 tightening is the sell-off in the kiwi dollar over the past two weeks.
It has made overall monetary conditions even looser than the bank had reckoned on for the balance of this year.
The question is how much difference that makes. Some of the factors behind the kiwi dollar's weakness are temporary: political uncertainty and Y2K-related investor preference for deep and liquid markets.
Secondly, the thrust of the August MPS, after all, was that while the economy is running on one engine, signs are that the engine on the export wing is starting to sputter into life. The prospect of better export volumes and prices, on top of tightening monetary policy, should be positive for the currency, even though that is next year's story.
The Reserve Bank has been emphasising for some time that the exchange rate effects of most concern to it are the effects on activity and demand a year or two out.
If it regards the dollar's present weakness as a short-term phenomenon, and is mindful that many exporters will be hedged at higher levels, it should not be too spooked by the current weakness of the trade-weighted index.
Finally, there are credibility issues. Commentators like Deutsche Bank's David Plank and WestpacTrust's Bevan Graham have emphasised the need for the Reserve Bank to build confidence in what is still a new OCR regime.
Mr Graham says that changing the cash rate purely on exchange rate grounds would potentially undermine the new regime by suggesting the bank remains enslaved to the monetary conditions index which, as last year showed, can provide perverse outcomes.
It would also appear to be a knee-jerk reaction, undermining the medium-term expectations that this monetary cycle will be less of a roller-coaster than the last.
On August 18, Dr Brash reaffirmed his preference for making changes to the OCR when monetary policy statements were released rather than at the intra-quarter reviews.
He should start as he means to go on.
Time to scotch cash rate speculation
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