By Roger J Kerr

Once upon a time, not so long ago, a quarterly CPI inflation figure would cause a real stir in the market with a whirl of pre and post release buying, selling and positioning.

My, times have changed.

Last week's CPI number came and went with hardly a blink recorded on the screens. No surprises and not much relevance to the current interest rate yield curve and outlook. The annual inflation rate should stay between 1.00% and 2.00% for the next 12 to 18 months. Whether the risks increase to lift it towards 3.00% later on depends entirely on what shape the economic recovery takes.

Up until a month ago we were looking optimistically at an export-led recovery to positive GDP growth later this year, well ahead of other countries. Pretty much exactly what RBNZ Governor Alan Bollard said last week.

But, the prospect of that return to positive GDP growth occurring has diminished over the last month.

The fall in the wholemilk powder price and the dramatic rise in the NZD value to 0.6500 against the USD are likely to lead to another downward revision in the milksolids payout forecast from Fonterra.

If and when Fonterra cut their forecast, the knock-on negative implications for the whole economy are serious. The export-led economic recovery would be in jeopardy and Bollard would keep interest rates at the low levels for longer.

Next Thursday the RBNZ review the OCR and the question is whether a cut to 2.00% purely to reverse the Kiwi dollar trend is being contemplated.

At this point I would not see any great risk to the economy and inflation if the RBNZ took this bold step to help the economy out of recession.

Unfortunately for USD exporters hoping for a Kiwi reversal, the Governor is not prone to bold action that might be a bit outside his mandate. The rationale for such a move would be to solely influence the FX markets. It would not upset the domestic economy or interest rate structure as the OCR remains in a world of its own anyway. Banks will continue to compete for domestic deposit monies at similar 3.50% to 4.00% rates they are paying now.

Interest rates are forecast to continue to move sideways across the page and will do so for a good few months to come yet. The exchange rate is the problem for the economy right now and Fonterra Chairman, Henry van der Heyden may be in a better position to influence that with affirmative action, rather than the "words that are having no impact" we are receiving from the Finance Minister and RBNZ Governor.

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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com