Smoke and mirrors: NZ talk on the currency

The Rates Blog has reported that John Key has stated that he believes the RBNZ will leave the official cash rate unchanged until at least mid-2010, because of the high dollar.

Now, I prefer it when politicians completely stay away from monetary policy.  However, instead of banging on about that again lets look at why he made this statement.

  1. He realises that a higher exchange rate implies that monetary policy is tightening and as a result makes the likelihood of a lift in the OCR lower (all other things equal of course),
  2. He heard the RBNZ say that it won’t until late-2010 and has heard them mention the dollar,
  3. Bill English has been saying that the high exchange rate is an issue, and given that a higher OCR often leads to a higher dollar this could be problematic.

However, if these are the reasons for making the claim I still have one underlying concern – the high exchange rate isn’t the problem, the factors that lead the exchange rate to be too high are at fault.  The high dollar is a symptom not a cause.

Truly, I think the discussion of the dollar is simply smoke and mirrors.  If we have an issue it is because of some underlying structural issue in the economy.  As a result, we should be asking what the structural issue(s) is instead of bemoaning the dollar and asking the RBNZ to ignore its inflation mandate.