NZ dollar reaches six-month low on prospect of more rate cuts

Thursday 24th July 2008

The New Zealand dollar fell to a six-month low after the central bank cut its benchmark rate from a record and said there's scope for more reductions as the economy weakens.

The Kiwi fell to 74.44 US cents after the central bank's announcement, from 75 cents. Governor Alan Bollard cut the official cash rate to 8% from 8.25%, saying even though inflation may peak at 5% in the September quarter, it will probably return to the bank's target range as the economy weakens.

"An easing campaign by the RBNZ will be an important catalyst for NZD depreciation," said Shamubeel Eaqub, director of Australia & New Zealand investment research at Goldman Sachs JBWere (NZ) "The NZD needs to depreciate significantly."

The New Zealand dollar traded at more than 80 US cents this year from less than 60 cents in January 2004, squeezing overseas returns for companies ranging from appliance maker Fisher & Paykel Appliances Holdings to dairy giant Fonterra. Shares of Fisher & Paykel, which has moved factories overseas to boost its margins, surged 4.5% today.

Economists say today's interest rate cut heralds the start of a prolonged series of reductions by the central bank. Stephen Toplis, head of research at Bank of New Zealand, said the official cash rate will have fallen to 7.25% by year-end and may be cut to as low as 5.5% by the end of 2009.

"Tighter monetary policy was prescribed to take the heat out of the economy and from the housing market in particular," Toplis said in a note.

"It has succeeded in doing so and the process has been exacerbated by a series of nasty shocks including the commodity price spike, credit crunch and drought," he said.

Bollard said he "would expect to lower the OCR further" provided the inflation outlook continues to improve and the Kiwi doesn't decline excessively.

By Jonathan Underhill

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