Forum Archive Index - February 2004

["Gary Cooper" <gary@tudorsteel.co.nz>]

The Reserve Bank has one brief… to maintain inflation between a certain level (1-3% if I remember correctly). They do this through signalling to the market that if the market does not move in the direction the Reserve Bank wants them too (ie in order to choke off or raise inflation) then the Reserve Bank will use what methods it has available to force the market to change, using monetary or fiscal policy.

 The markets can and do adapt to these signals because they trust that the Reserve Bank will stick to it’s one brief… ie maintaining inflation within the band. Were the Reserve Bank to start playing around with the OCR looking to decrease the amount of foreign investment (and therefore lower the NZ$), then they would risk losing the faith based mechanisms they enjoy for signalling their wishes to the markets, if by doing so they change focus from maintaining inflation to trying to manipulate the NZ$, especially considering (as someone else has said) that by trying to manipulate the price of the NZ$ they end up having to revert back to trying to keep the NZ$ within a certain band.

 So really, as far as I’m concerned, the RB should do absolutely nothing to the OCR with the view to lowering the value of the NZ$ UNLESS it is with the aim to maintain the inflation band. If the RB needs to switch focus, then it’s not a matter for Bollard to concern himself with, it’s a matter for Parliament (and Cullen) to look at.