NZ Herald criticises the Reserve Bank

The NZ Herald editorial is critical of the Reserve Bak’s currency intervention and quotes the RB’s own research back at it:

Most fundamentally, Dr Bollard has erred by sending out a conflicting message. Just last Thursday, while lifting the official cash rate to 8 per cent, he implied a steelier approach to tackling inflation, notably by taking the wind out of the housing market. Further tightening would, it seemed, follow. Monday’s intervention conveyed a totally different impression. Selling the kiwi to lower the exchange rate is an easing move. As such, it is at odds with the thrust of overall monetary policy, and should not have been contemplated at this time.

The contradiction was expressed succinctly in a paper by bank staffers Kelly Eckhold and and Chris Hunt in 2004. “Intervention should be timed to roughly coincide with the broad thrust of interest rate settings,” they wrote. “It makes little sense to intervene to try to push the exchange rate lower when the bank believes that higher interest rates may be required in the near future to control inflation pressures. In this situation, a successful intervention would inappropriately loosen monetary conditions.”

I commented at the time, that the messages were somewhat contradictory.