NZ dollar jumps after RBNZ trims OCR, says kiwi needs to be lower

Thursday 23rd July 2015

The New Zealand dollar jumped more than half a US cent after Reserve Bank governor Graeme Wheeler cut the official cash rate by a quarter-point and said the currency needs to be lower, while dropping a reference to criteria that justified intervention.

The kiwi rose as high as 66.47 US cents from 65.78 cents immediately before the release, and was recently trading at 66.41 cents. Wheeler lowered the OCR by 25 basis points to 3 percent due to "the softening in the economic outlook and low inflation," largely meeting market expectations which had priced in an outside chance of a deeper cut, and said more easing was likely.

He dropped his reference to the New Zealand dollar being unjustifiably and unsustainably high - criteria which warrant intervention - while saying its significant decline since April and lower interest rates have led to easier monetary conditions. The Reserve Bank had reiterated the currency was at "unjustifiable and unsustainable levels" in its statement of corporate intent, released last month, having removed the reference in the June 11 monetary policy statement.

"While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices," Wheeler said.

Westpac Banking Corp market strategist Imre Speizer said the guidance wasn't strong enough and "the currency warning was arguably watered down a bit."

BK Asset Management managing director Kathy Lien said in a note the removal of that guidance suggests the next cut won't be at the September meeting, though any gains in the currency should be capped due to the easing bias.

Still, ASB Bank chief economist Nick Tuffley said while foreign exchange markets may make a lot out of the changed guidance on the currency, "the key message from the RBNZ is it wants to see the NZD lower in the wake of yet further dairy price declines."

Wheeler kicked off an easing cycle last month as inflation stayed below his target band and falling dairy prices lead to a deterioration in the country's terms of trade, forecasting the 90-day bank bill rate, often seen as a proxy for the OCR, would fall to 3.3 percent in the December quarter before bottoming out at 3.1 percent in June 2016. At the time, he told politicians he was watching a number of indicators including inflation signals, commodity prices and the falling currency in gauging whether to cut interest rates again.

Government data last week showed New Zealand's consumers price index rose at an annual pace of 0.3 percent, and Wheeler said the headline rate was tracking below the bank's 1 percent to 3 percent target band "due largely to previous strength in the New Zealand dollar and a large decline in world oil prices." Non-tradable inflation, which covers the domestic sector, increased at an annual 2 percent pace in the period, its lowest level since December 2001.

The bank expects the annual CPI to rise to around 2 percent, its target mid-point of the range early, next year, though "a key uncertainty is how quickly the exchange rate pass-through will occur," Wheeler said.

The Reserve Bank has been juggling the competing tensions of a strong dollar eroding export receipts against rapid house price gains in Auckland. It settled on imposing new lending restrictions on property investment loans as a means to try and cool the housing market from October.

Wheeler said Auckland house prices are still rising at a rapid pace, though outside the nation's biggest city house price inflation was "relatively low." Increased building activity is under way in Auckland, though "it will take some time for the imbalances in the housing market to be corrected," he said.

Two banks, ANZ Bank New Zealand and Kiwibank, immediately announced mortgage interest rate cuts.

ANZ will cut the rates on its floating and fixed (ANZ’s ‘flexible’) home loans by 0.25 percent per annum to 6.24 percent and 6.35 percent respectively, with the new floating rate applying for new customers from July 27 and for all existing floating and fixed rate customers from Aug. 10.

Kiwibank said it would immediately cut floating and revolving credit mortgage rates by 25 basis points, down from 6.4 percent to 6.15 percent, for new customers, with existing customers getting the cut in a fortnight.

BusinessDesk.co.nz

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