NZ dollar falls after RBNZ unexpectedly sticks to rate track view

The New Zealand dollar dropped after the Reserve Bank surprised investors by keeping its interest rate track unchanged, despite recent data showing a spike in inflation and a strong labour market. 

The kiwi fell to 68.34 US cents as at 5pm in Wellington from 69.34 cents at 8am and 69.01 cents yesterday. The trade-weighted index declined to 74.74 from 75.40 yesterday. 

RBNZ governor Graeme Wheeler kept the official cash rate at 1.75 percent and stuck to his view that the rate doesn't need to move until 2019, saying a recent spike in inflation from movements in oil and food prices will only be temporary. That stance put the RBNZ at odds with a number of economists, who expect it will have to raise rates earlier than 2019, however Wheeler told Parliament's finance and expenditure select committee that he wasn't seeing significant wage inflation and that weaker than expected growth last year meant there wasn't the same capacity pressures the bank may have been anticipating. 

"This was far more dovish than everyone in the market was thinking - we've called it aggressively neutral - it smacks you in the face with how neutral they were, they say everything that's happened in February was neutral for monetary policy," said Phil Borkin, an economist at ANZ Bank New Zealand. "We've seen the currency sink one big figure (1 US cent) on the back of it, and it's stayed there." 

The Reserve Bank lowered its projected track for the TWI, with the prospect of future interest rate hikes by the Federal Reserve reducing the kiwi's interest rate differential with other currencies, and deputy governor Grant Spencer told politicians the US dollar component of those assumptions meant the New Zealand dollar would probably be in the low-60s US cents level. 

Two-year swap rates fell 8 basis points to 2.26 percent and 10-year swaps declined 4 basis points to 3.38 percent. 

ANZ's Borkin said the bank expects the kiwi to decline as the interest rate differential with the US continues to shrink with the Fed raising rates, but would fare differently on the cross-rates with New Zealand's relatively positive economic outlook. 

In other data today, food prices fell in April as cheaper grocery items offset increases in vegetable prices. 

The local currency dropped to 93.02 Australian cents from 93.70 cents. The kiwi declined to 4.7167 yuan from 4.7627 yuan and fell to 78.02 yen from 78.51 yen. It decreased to 62.86 euro cents from 63.35 cents and fell to 52.86 British pence from 53.28 pence.

(BusinessDesk)