In raising its key interest rate to 3.25%, the Reserve Bank of Australia is the first country to reverse the cycle of cuts triggered by the global financial crisis. As it shifts away from the “emergency” phase of using monetary policy as an economic stimulus, it is signalling its intention to tighten at a modest pace. Analysts in Aust expect another rise of 25 basis points by Christmas, with the market pricing in a cash rate of 5% at the end of 2010. The RBA’s move should give foreign exchange traders a fresh incentive to differentiate between the AUD and the Kiwi dollar.

This week the Kiwi dollar pushed through the US73c level, and shows little sign of returning to what analysts regard as “fair value.” The seemingly inexorable rise in the dollar is squeezing the export sector harder day-by day. This is leading critics of the current economic orthodoxy to question whether the strategy of defining macro-economic policy in exclusively monetary terms, and of directing the whole force of the policy to the single goal of controlling inflation, should be revised. The option of setting the goals of macro policy (including interest and exchange rates) in terms not of inflation but of competitiveness, as Singapore does, should now be adopted in NZ, say the critics.

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