John Key expects OCR to remain on hold until 2010 if currency remains strong (Update 1)

"The very high exchange rate is helping offset any imported inflation concerns," Key was quoted as saying in an interview yesterday in Kuala Lumpur. "I would personally be surprised if they raise rates in 2009." "We would prefer a lower exchange rate and that would help our exports," he said after signing a free trade agreement with Malaysia. "It would certainly help in terms of rebalancing our economy." He declined to give a New Zealand dollar forecast. Key said historically the New Zealand dollar has never been "sustainable in the long-term" in the 75 to 80 cent range. "But we're facing difficult, unusual circumstances at the moment, so I wouldn't want to make a prediction," he said. "It is not just the New Zealand dollar that is appreciating. You are seeing the same for the Australian dollar, South African rand, Swiss franc, British pound and the euro," he said. "In that regard, it is very difficult for New Zealand to do a lot actually to see our currency trade at lower levels against the U.S. dollar." "The Treasury in New Zealand would tell you that we're in for a decade of deficits, but the government is working quite hard to get on top of that," he said, highlighting efforts to contain spending, boost public sector efficiency and harness technology. Key also commented on the potential for tax reform. "Whether any will be adopted, it is too early to tell," he said. "But we are at least looking at making sure the base of our tax system is sound." What I think

I'm surprised Key is commenting so specifically and repeatedly on the OCR so close to an OCR announcement. What does he know we don't? Key may argue that he is simply reflecting market expectations of what the independent RBNZ will do, but his view that the OCR would not move until the latter part of 2010 is also at odds with those market views.