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This wasn’t supposed to be a monetary policy week, really. It’s just worked out that way.

Two bits crossed my desk this morning emphasising the tight conditions, possibly too tight.

The NZIER Shadow Board opinion was released this morning. The Board is a group of economists that NZIER has organised to provide peer review of the RBNZ policy decisions. The press release has Kirdan Lees saying:

“On balance, the Shadow Board thinks rates should be held at low levels. Lowering interest rates further has more support than raising interest rates at this point.”

A harsher assessment is in the Dec 2012/Jan 2013 Unlimited. The piece is on-line from 10 December last year, so I’m obviously coming to this late. Donal Curtin recalculates the Monetary Conditions Index to assess monetary conditions. The Index

combines interest rates and the overall value of the Kiwi dollar into a single number, the aim being to measure the combined impact of interest rates and the Kiwi dollar on companies.

Donal concludes that, indeed, the combined monetary conditions are tough. His prescription? Lower the Bank rate. This is pretty standard monetary theory. We can’t do anything about the exchange rate. New Zealand has a floating exchange rate and that’s generally good. But, part of the reason for the demand for our dollar is the slightly higher interest rates here. A lower Bank rate would lead to lower commercial rates, which leads to lower demand for the dollar and a lower exchange rate.

He hedges his bets, of course — hedging is a good strategy in policy advice — but the advice is still there:

There’s no guarantee that cutting interest rates to even lower levels would get the Kiwi dollar lower — but in the current global environment, when even small positive yields on Kiwi dollar deposits are attracting international buying, it’s worth a go.

I don’t think anything much has change since last month.