NZ dollar falls as Bollard backs away from early rate hike amid global turmoil

Thursday 15th September 2011

The New Zealand dollar dropped half a U.S. cent after Reserve Bank Governor Alan Bollard backed away from hiking interest rates in the immediate future, leaving the official cash rate at 2.5%.

The kiwi dollar fell to 81.61 U.S. cents from 82.22 cents immediately before the statement after Bollard said the impact of the global turmoil will determine whether he starts lifting the benchmark interest rate over the coming year or if he keeps the OCR on hold for longer.

“The market was looking for more firmer indications that he was going to raise rates,” said Bank of New Zealand strategist Mike Burrowes. “New Zealand really stands out as the only country with rate hikes priced in the next 12 months. With the Reserve Bank suggesting it's going to be more cautious on risks to global economy, that's seen the kiwi come off.”

Bollard told reporters in Wellington the kiwi dollar is still “over-valued on long-term fundamentals” and not a tool he wants to use to keep imported inflation in check.

“The high level of the New Zealand dollar is having a dampening influence on some parts of the tradeable sector and on imported inflation,” he said.

Bollard said he will watch the Swiss National Bank’s “bold experiment” to impose a ceiling on the franc with “interest,” though wouldn’t be drawn to comment on whether he would introduce a similar measure for the kiwi dollar.

The bank lifted its forecast track for the currency on a trade-weighted basis to peak at an annual average 71.60 in the 12 months ended March 31 next year. That’s up from 68.60 in its June projection. The kiwi topped 88 U.S. cents in a post-float at the start of August, and has stayed in the 80s since then.

Bollard said he will keep interest rates on hold if the global financial situation deteriorates further, and has a “severe” impact on New Zealand’s economy. If it has a “mild” impact, he’ll look to raise rates over the coming year.

He likened a severe situation to the post-Lehman Brothers collapse in September 2008, when international money markets stopped lending to Australasian banks, and said a mild impact would be more like the late-2007 collapse of Northern Rock, when Australian and New Zealand lenders were still able to secure funding.

The Reserve Bank’s reined in its forecast for the 90-day bank bill through 2012 and 2013, with the rate settling at 4.3% in the December quarter next year where previously it was seen climbing to 4.9% by the end of 2013 in the June forecast. The rate is often seen as a proxy for the track of the OCR. The 90-day bill was unchanged at 2.95%.

ANZ New Zealand senior interest rate strategist David Croy said the 90-day bank bill projections were in a “happy middle ground” in that they were higher than what the market was picking, but “substantially lower than in June.”

At the last OCR review, Bollard indicated he wanted to remove the emergency stimulus from his 50 basis point cut in response to the February earthquake, saying there was little need for it to stay in place as New Zealand’s economic recovery took hold. Since then Europe’s sovereign debt crisis and the prospect of a faltering U.S. economy sent financial markets into turmoil and have stayed the Governor’s hand.

The central bank said market pricing for OCR hikes over the coming six months is “broadly unchanged” compared to the June statement, though the pace of further hikes has been pared back. Traders were betting Bollard will lift the OCR by 48 basis points in the coming 12 months, according to the Overnight Index Swap curve.

Still, Bollard was more upbeat about the domestic economy’s strength, saying activity surprised on the upside and capacity usage looks to have increased. That was filtering into households, which have become more confidence about spending, and helped stoke the housing market, which languished through most of last year.

The bank expects the economy to grow 2.8% in the March 2012 year, up from 2.5% in the June forecast, with slower growth in 2013 of 3.1%, compared to 4.6%. The bank said the slower pace of expansion was due to the delays in the Christchurch rebuild as aftershocks put off construction. The bank lifted its forecast cost for the Canterbury earthquakes to $20 billion.

Stronger than expected growth in the first three months of the year and tightening capacity has stoked concerns over inflationary pressures, and the consumer price index rose 1% in the second quarter, for an annual pace of 5.3%.

Bollard said underlying inflation is rising, but is estimated to be near 2%, the mid-point of the bank’s target band of between 1% and 3%.

The central bank expects the annual pace of headline inflation, which includes the government’s hike in GST last year, peaked in the June quarter at 5.3%, and is picking that to slow to 4.9% in the September period.

(BusinessDesk)

BusinessDesk.co.nz

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