RBNZ's weaker dollar outlook signals cut to OCR less likely

The Reserve Bank of New Zealand's view that the kiwi dollar is set to fall further has reduced prospects of a cut in an official cash rate that is already at a record low, economists say.

In its latest financial stability report, the Reserve Bank said New Zealand's currency may fall because of "deterioration in market sentiment or a more marked fall in commodity prices." The kiwi has "increased strongly" since November, with large economies printing money and investors favouring higher-yielding assets. Last week, the New Zealand dollar dropped below 80 US cents for the first time since January.

"The decline in the New Zealand dollar has removed some of that pressure and it highlights a rate cut is unlikely in the current environment," said Jane Turner, economist at ASB Institutional.  

Traders are pricing in 33 basis points worth of cuts to the official cash rate over the next 12 months, based on the Overnight Index Swap curve. Governor Alan Bollard has previously warned he may have to cut the official cash rate if the currency stays resiliently high without economic fundaments improving to support its strength.

"Our view has been that a rate cut for the Reserve Bank has been unlikely - since April's official cash rate review we have seen markets price in a rate cut which is surprising," Turner said. "We are forecasting for rates to increase in 2013 - the New Zealand dollar's decline over the past few days has been driven by weaker risk appetite from offshore and that economic uncertainty will continue."

Bollard told a media conference in Wellington the decline is "presumably a response to a number of things, one of which is a risk-off environment in Europe, but also a recognition in FX markets about our softer commodity prices and few bits of softer data in Australia and NZ.

"That's been moving in a direction which we would have thought was broadly in line with fundamentals," Bollard said.

The kiwi dollar fell to a four-month low 78.61 US cents today and recently traded at 78.75 cents. The trade-weighted index fell to 70.59 from 70.94 late yesterday.

Bank of New Zealand currency strategist Mike Jones said the currency could fall to 75 cents in the next few weeks, while Westpac Banking market strategist Imre Speizer is targeting a decline to at least 78 cents in the coming weeks.

BusinessDesk.co.nz

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