The Reserve Bank has warned the New Zealand dollar is too high and it has signalled an interest rate cut is likely next month.
The Bank (RBNZ) has issued a special economic update, three weeks ahead of the release of its next Monetary Policy Statement.
The RBNZ says the trade-weighted exchange rate is six percent higher than the Bank forecast last month.
"The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed."
The RBNZ also said "Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range."
Economists at ASB are predicting the RBNZ will cut the Official Cash Rate to 2 percent next month and 1.75 percent in November.
They say "The RBNZ explicitly stated a decline in the exchange rate is needed. This suggests the RBNZ has opened the door to OCR cuts below 2 percent, a move the RBNZ had previously indicated a very high threshold for doing so."
The RBNZ statement had an immediate impact on the New Zealand dollar.
Within minutes the dollar had fallen around half a cent against the US greenback, trading at 69.70 US cents compared to 70.20 cents ahead of the announcement.
The kiwi fell to 93.30 Australian cents by 9.30am, compared to 93.90 before 9am.
Weak inflation and a high dollar are usually a recipe for an interest rate cut. But the red hot property market had cast doubt on that. Any cut to rates could further fuel house prices.
That is why the Reserve Bank went ahead on Tuesday and announced plans to toughen up the lending rules for investors.
From September, most loans to property investors will require a deposit of 40 percent. The banks will still be able to make five percent of their investor loans to people with a lower deposit. But in practice, they will stay well below that threshold.
Already Westpac has announced it will no longer take any new applications from investors with a deposit of less than forty percent.
The special update has been issued today because the RBNZ has changed the timetable for its OCR announcements. That meant there was a longer than usual gap between Monetary Policy Statements.