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Kiwi, interest rates plunge after deadly Christchurch quake

Tuesday 22nd February 2011

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The New Zealand dollar plunged nearly one US cent following today's devastating earthquake in Christchurch as investors anticipated further delays to the country's economic recovery.

Multiple fatalities have been reported in the central city, including two buses crushed by falling buildings, after the shallow 6.3 magnitude quake struck at 12.51pm.

Central Christchurch was evacuated as police received reports of widespread damage to buildings and infrastructure, with reports of fires and people trapped inside buildings.

News of the quake immediately pushed the kiwi down 0.9c, and it was likely to sink further tonight in an already negative market, said Westpac currency strategist Imre Speizer.

"Those headlines are fairly sensational, and as the offshore markets come in overnight in Europe and New York I think you'll probably get more selling of kiwi to come on the back of this.

"Economically, this basically puts things back even further in terms of a recovery," he told NZPA.

Interest rates also plunged. The two-year swap, the best indicator of wholesale interest rates, was down 15 basis points from just before the quake compared with the usual two to three-point daily move.

"The thinking, is what's the effect of this on monetary policy - it means that interest rates stay on hold even longer," Speizer said.

Trading continued on the sharemarket, but only two stocks on the top-50 were up - one of them Fletcher Building, which has been contracted by the Earthquake Commission to undertake $1 billion in reconstruction projects. Fletcher's share price was up 2%, or 17c, at $8.47 late this afternoon.

Westpac senior economist Dominick Stephens said the quake will cause significant short-term disruption to economic activity, with people unable to go to work and get into shops.

"I think the loss of life and the extent of damage this time compared with September has shocked confidence significantly more," he told NZPA.

Canterbury was hit by a 7.1 magnitude quake in September, causing widespread damage but no fatalities. Today's quake was considered an aftershock.

It was possible the Reserve Bank would cut the Official Cash Rate, perhaps before its next scheduled decision on March 10, despite having taken no such action after last year's quake.

"We regard it only as a possibility, but the confidence impact is going to be dramatically different to September because of the loss of life and greater extent of damage," he said.

Reconstruction from the September quake expected to start now would now be postponed further, with even more damage to deal with.

The initial earthquake was estimated to have shaved about 0.5 percent off gross domestic product growth in the December quarter and was partly responsible for a negative reading in the September quarter.

December quarter GDP data, which Mr Stephens said was expected to be positive, is released on March 24.

"We were expecting decent economic growth in the March quarter of 2011, that's been wiped off by this earthquake."

The country emerged from a brief recession in mid-2009.

In the long run, the quake will actually stimulate construction activity and could boost inflation, he said.

Total rebuilding costs from the last earthquake are estimated around $4 billion.



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