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Dollar little changed before inflation

By Paul McBeth

Monday 20th October 2008

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The New Zealand dollar was little changed before figures this week that may show inflation at an 18-year high, while the central bank is expected to cut rates by the most since the official cash rate (OCR) was introduced in 1999.

The monetary policy review comes as governments worldwide continue efforts to shore up the banking system, with South Korea pledging to guarantee US$100 billion in bank debts and supply lenders with US$30 billion. Helping underpin the kiwi, Finance Minister Michael Cullen said the government was cautiously investigating whether to extend its deposit guarantee scheme to cover wholesale deposits, matching Australia.

"The big focus this week will be the Reserve Bank of New Zealand decision on Thursday," said Danica Hampton, currency strategist at the Bank of New Zealand. "Market pricing is consistent with the RBNZ cutting 100 basis points this week."

The New Zealand dollar rose to 61.50 US cents from 61.17 cents and 62.37 yen from 62.18 on Friday. It fell to 88.18 Australian cents from 88.76. Michael Gordon, market economist at Westpac Banking Corp., said the kiwi will likely trade between 60.5 and 62.5 US cents today.

Lower interest rates diminish the appeal of the local currency to investors seeking higher-yielding assets, such as investors who borrow in yen. Japan's 10-year government bonds yield 1.57% while New Zealand's was recently at 5.93%.

Westpac is forecasting third-quarter inflation accelerated to 5.2%, reflecting rising food prices and a weaker currency, which drives up the cost of imports, Gordon said. The figures are released tomorrow.

Gordon said the central bank will cut rates regardless of inflation figures because "there's an economic case for a large cut anyway."

The New Zealand government may be moving closer to matching Australia's bank deposit scheme by guaranteeing wholesale deposits between banks, Hampton said.

Wholesale deposit guarantees, giving banks confidence to lend to one another, have become the "world standard price of entry" to combined efforts to restore confidence in the financial system, Gordon said.

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