Reserve Bank governor Alan Bollard seemed to be calling the bluff of the currency markets with his hints the central bank would reassess the outlook for monetary policy settings should the exchange rate stay high.
"This is serious stuff, but potentially a very dangerous approach Bollard is taking," BNZ market economist Stephen Toplis said.
"He seems to be calling the bluff of the currency markets.
While we can understand why someone would like for the New Zealand dollar to be lower than where it is, we think it is especially dangerous for the bank to be presuming it can lower it simply by softening its view on its policy rate."
Quite apart from there being no overwhelming international evidence that intervention worked, with even the richest central banks of the world sometimes hugely out of pocket for their efforts, it could all backfire on the Reserve Bank, Mr Toplis said.
To the extent foreign exchange traders believed Dr Bollard was being drawn into providing more "juice" to the economy than was justified through lower lows in local interest rates, they might be inclined to envisage further upside in the dollar.
The Reserve Bank would have to reverse tack on account of the domestic inflation pressure it was inviting, he said.
"This is no idle musing on our part. I
"It's reminiscent of what happened over the last cycle when the foreign exchange markets continued to bid the New Zealand higher on the perception - correct, as it turned out - that the bank was behind the curve. It's a one-way bet foreign exchange traders dream about."
It was interesting to see the dollar move up immediately in response to the remarks by Dr Bollard, Mr Toplis said.
Intervention by the bank was something to watch out for.
