NZ dollar drops below 71 US cts as RBNZ's McDermott keeps rate cut plan intact

Tuesday 11th October 2016

The New Zealand dollar fell below 71 US cents for the first time in two months as Reserve Bank assistant governor John McDermott reaffirmed the bank's intention to cut interest rates further.

The kiwi dropped to 70.69 US cents at 5pm in Wellington from 71.26 cents at 8am and 71.53 cents yesterday. The trade-weighted index fell to 75.86 from 76.47 yesterday.

The RBNZ anticipates it will need to make monetary policy looser to try and stir inflation, which will remain subdued in the near term, McDermott told a business audience in Rotorua. The bank's forecast for annual inflation in the September quarter is 0.2 percent, though its margin of error means the annual consumers price index could be between zero and 0.5 percent, before rising to the lower end of bank's 1-to-3 percent target band in the December quarter.

"He simply reminded the market that the cut is still in the pipeline and it will be soon," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "Just a reminder was enough (to push down the kiwi) because the market has priced out quite a bit of easing in the last few weeks."

New Zealand's two-year swap rate fell two basis points to 2.02 percent and 10-year swaps increased one basis point to 2.6 percent.

McDermott acknowledged the strong level of migration had increased New Zealand's ability to grow without spurring inflation, and earlier today Immigration Minister Michael Woodhouse announced new policies that would curb the number of new migrants entering the country.

Westpac's Speizer said that policy could be interpreted as either a positive or a negative by investors, with lower migration reducing the labour supply which would push up wages and lift inflation, or cutting consumer demand and stifling growth.

Government data today showed retail spending on credit and debit cards rose 1.9 percent in September as the first month of spring attracted tourists and boosted spending in the hospitality sector.

The kiwi fell to 93.60 Australian cents from 94.18 cents yesterday and dropped to 4.7455 Chinese yuan from 4.7925 yuan. It slipped to 73.39 yen from 73.57 yen yesterday and decreased to 63.49 euro cents from 63.92 cents. It fell to 57.36 British pence from 57.69 pence.

BusinessDesk.co.nz

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