I thought we would revisit this sooner rather than later - as was discussed some months ago on your blog their is a real risk that the FX markets give the kiwi a real kicking (why wouldn't you be short given the signals that the RBNZ has effectively given up on its inflation targeting?). What is noteworthy is that the RATE of decline is increasing. I believe the RBNZ in its model had the kiwi falling to .70US by Q1 on 2009? We are likely to hit that in August. Those carry trade investors still exposed must be taking a hell of a beating on currency losses, which can only increase the urge to dump the kiwi. FXs moves generally overshoot (in both directions), so expect increasing pressure on the kiwi. The US$ is also resurgent (largely because the Eurozone looks in worse state than the US) so its a magnified force.

Bollard forced into an about turn by the FX markets, and our 'professional' bank economists blind sided? I for one would be highly amused by their 'surprise' if so caught out. Anyone for an Icelandic experience?

Looking at what's happened in the US as its currency has plummeted over the past 2 years, I don't think RBNZ has anything to worry about. Consumers simply pulled their horns in as the currency fell and imports became more expensive. As a result the much-maligned US trade deficit has improved markedly, a factor that's now feeding a recovery in the USD. Bollard also has a firm grip on the extent to which our large importers are hedged and hence do not have to pass on the full impact of the NZD's coming fall to the consumer. Keep the rates cuts coming as planned - any further delay will simply increase the pain further down the track and put off the badly needed adjustment in asset prices.

Mitch - you are destined to be very, very disappointed if you think oil (the principle commodity to which I think you are referring to) is going to drop back to where it was few years ago. As I keep saying, if the downward 'speculative' pressure continues for too long OPEC will simply cut production.

Dosser - how will cutting interest rates allow asset prices to adjust downwards? I am guessing that you are referring to assets such as houses (maybe shares?). Lower interest rate inevitably serve to inflate such asset prices (or am I missing something)?

Re;the US - the FED would very very much like to cut interest rates - and I see little sign of a meaningful US recovery (as this is its default position when confronted with anything remotely challenging). They are being prevented from doing so PRECISELY because the US $ devaluation resulting from previous cuts has led to a surge in imported inflation. Interesting parallel, perhaps?

Andy, I don't think an RBNZ rate cutting program will have much effect on domestic mortgage rates, which are largely being driven by rising credit spreads and pressure on banks to expand their margins and maintain profit levels. I think one paradox we'll see, at least at the initial stage, is that the fall in the NZ dollar induced by lower rates will increase the price of foreign capital to NZ banks and force them to leave their lending rates higher for longer. I don't see domestic investors being in a position to provide much more long term capital to NZ banks, which will be forced to use more expensive sources of offshore funding as carry traders run for the hills. The net effect may be that NZ house prices suffer a sharper fall than they would if NZ kept the OCR where it is and Mrs. Watanabe carried on funding us. The only wild card is Kiwibank, which has been and will be instructed to lower mortgage rates in an election year.

We should never underestimate the stupidity of the Big 4. Despite clear signs that the Aussie house market has hit a brick wall the big banks are still offering 100% loans. Disquieting parallels with the situation the UK just a few months ago (before things their got really, really bad):
http://business.theage.com.au/business/anger-over-100-home-loans-2008080...

Andy, I think the big 4 banks have realised they're the only game in town now that finance companies have been discredited, so they don't have to try too hard to attract deposits. The only problem is that the potential pool of deposits in NZ has shrunk and the well is pretty much dry now. Kiwibank's a small player but I think it punches above its weight by forcing the big 4 to follow its lead on mortgage rates. I can't believe that the big 4 would have cut rates if Kiwibank wasn't around - look at what their parent banks have done in Oz with rate increases over and above any RBA hikes. Their NZ subsidiaries don't want to lose market share as people refinance their fixed rates.

On the contrary, if, as I believe, OPEC defend $110 or $100 a barrel it tells us a) they know that non-OPEC suppliers (the rest of the world) are unable to increase supply to force the issue (which is pretty much general knowledge in the field anyway, just take a look at the EIA data for May out today) and b) they are unprepared to sell their oil any cheaper than that to us because they know it will be a great deal more expensive down the line, irrespective of what the price is doing now to the global economy. Ten years ago dogma was that OPEC would never let oil rise to the point that it harmed the world economy, which in turn would have stimulated a) fresh non-OPEC fields to be developed and b) alternative fuels. Since non-OPEC is largely a busted flush in a), and since there since nothing imminent in b) what OPEC does next will be very, very informative.

So lets wait and see........