Kiwi falls after Prime Minister talks down interest rates

Wednesday 2nd March 2011 1 Comment

The New Zealand dollar plunged nearly a US cent this afternoon in reaction to comments by Prime Minister John Key on the outlook for interest rates.

"The market has priced in a cut from the Reserve Bank," Key said in an interview with Bloomberg today. "That would probably be my expectation, that the Reserve Bank would cut," he said.

The NZ dollar fell from around US74.70c to US73.88c on the report. It was at US75c at 8am and US75.22c at 5pm yesterday.

Economists have been speculating that the Reserve Bank of New Zealand (RBNZ) will cut the official cash rate by 50 basis points to 2.5% on March 10 to ease the impact on the economy from the magnitude 6.3 earthquake in Christchurch last week.

However, some economists have argued that the impact of natural disasters should be addressed by fiscal policy not monetary policy.

Key was saying that a rate cut was a good idea, said Derek Rankin of Rankin Treasury.

"I think the market sentiment is to sell the NZ dollar anyway at the moment. I'm not sure that cutting interest rates is the best thing to do but the market is merrily pricing it in," he said.

Investors had "given up on the NZ dollar for the minute" and were thinking it had further to fall.

The currency has support around US73.50c, a level it last tested in December last year.

Rankin said it would be nice if you could just cut interest rates for Christchurch in the way that petrol companies had cut petrol prices but finance did not work that way.

"Interest rates are a blunt instrument," he said.

Trading banks this week cut their fixed mortgage rates but Rankin said this was a marketing move because few homeowners were taking out fixed rate mortgages.

He said the New Zealand commodity story was still a good one but the market was totally focused on the interest rate outlook for New Zealand.

The New Zealand dollar was also weak against the Australian dollar, which was boosted by gross domestic product data, which came in on expectation, but nevertheless showed the Australian economy expanding by 0.7% in the December quarter.

The New Zealand economy is expected to be flat for all of 2011 and there is a possibility of a small recession.

The NZ dollar fell to be A73.12c this afternoon after trading in a narrow band between about A73.90c and A73.65c on Tuesday night. It was A73.86c at 8am and A73.99c at 5pm yesterday.

The Australian dollar hit its highest level against the NZ dollar in 19 years today on diverging interest rate views, Reuters reported.

The NZ dollar was down to 0.5368 euro in afternoon trading from 0.5435 euro at 8am and 0.5446 at 5pm yesterday.

The trade weighted index dropped to 65.39 from 66.45 yesterday.

NZPA

Comments from our readers

On 2 March 2011 at 6:59 pm Arty said:

Very sad for savers. On one hand the Government and country needs the cash from savers to reduce our dependancy on overseas borrowings and therefore out outgoings, but on the other they treat savers badly and as if they are fools. 2.5% less tax is a joke. 2.5% is a joke. Savers are being forced to place money into property or other places. Is property inflation the goal of Government? Remove tax on NZ resident savers.