Rates to fall below Australia

By Paul McBeth

Monday 2nd March 2009

New Zealand rates are set to fall below Australia's for only the second time since the official cash rate was implemented in 1999, as the nation's economic performance lags behind that of its biggest trading partner.

The Reserve Bank of Australia is forecast to cut its benchmark rate by 25 basis points to 3% tomorrow, according to a Reuters survey of economists.

On March 12, the Reserve Bank of New Zealand is expected to slash the official cash rate by 75 basis points to 2.75%, according a Bloomberg survey. The rate gap in Australia's favour is likely to drive the kiwi dollar lower against its trans-Tasman counterpart.

"Australia's rates will be higher than New Zealand's, and that takes away your yield support for the currency," said Imre Speizer, currency strategist at Westpac.

The kiwi fell to 77.98 Australian cents today, from 78.49 cents in New York on Friday. The kiwi has slid from as much as 92.32 Australian cents on October 10 and is now at a seven-month low.

In June last year, New Zealand's 10-year government bonds were yielding as much as 6.59%, or about three basis points less than Australia's 10-year debt. Now New Zealand's 10-year bonds are yielding 4.52%, 12 basis points more than their Australian counterparts, according to Reuters data.

Last week, the World Bank offered 3.4 million uridashi bonds maturing in February 2012 in New Zealand dollars at 2.78%, 13 basis points higher than the 15.5 million bonds sold in Australian dollars.

Bank of New Zealand chief economist Tony Alexander predicts the increased yield for Australian assets will probably "manifest itself in the exchange rate" and will push the kiwi dollar below 78 Australian cents.

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