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NZ dollar soars as Wheeler cuts OCR to 2%, says further easing required

Thursday 11th August 2016

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The New Zealand dollar soared more than 1 US cents after Reserve Bank governor Graeme Wheeler cut the official cash rate to 2 percent, as expected, and said further easing is required, still a less-dovish statement than some in the market had been expecting.

"Monetary policy will continue to be accommodative," Wheeler said in the statement.  "Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.  We will continue to watch closely the emerging economic data."

The kiwi rose as high as 73.41 US cents after the monetary policy statement was released, from 72.02 cents immediately before. The trade-weighted index rose as high as 77.28 and was recently at 77.02, from 76.21 before the statement.

Traders were expecting a more definitive statement about further easing from a central bank trying to restrain a strong kiwi dollar that's preventing the economy importing inflation. Today, Wheeler said the high exchange rate was "adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector."

"This makes it difficult for the bank to meet its inflation objective.  A decline in the exchange rate is needed," he said.

Wheeler signalled a rate cut was imminent when he made an unexpected statement last month that "further easing was likely" as a strong currency made it hard for him to meet the mandated target of keeping inflation between 1 percent and 3 percent over the medium term. Consumer prices rose an annual 0.4 percent in the June quarter, its seventh quarter below the band with the strong kiwi's deflationary effect being compounded by last year's slump in oil prices.

The Reserve Bank has been reluctant to cut the official cash rate too far for fear of further inflaming a housing market that's threatening financial stability in a world where rates are near zero, making New Zealand assets offer better returns and stoking demand for the currency. The announcement of new loan-to-value ratio restrictions for banks and the unscheduled economic update raised expectations the RBNZ would try to talk down the currency and signal more rate cuts.


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