Kiwi dollar, swap rates tumble as Wheeler wrong-foots market with OCR cut

Thursday 10th March 2016

The New Zealand dollar fell almost 1 1/2 US cents and swap rates tumbled after Reserve Bank governor Graeme Wheeler surprised financial markets with a cut to the official cash rate and signalled more to come.

The kiwi dollar touched 66.38 US cents, the lowest in a week, from 67.78 cents immediately before the 9am release of the monetary policy statement. The trade-weighted index dropped to 71.44 from 72.70. The two-year swap rate fell to 2.25 percent from 2.45 percent.

"The trade-weighted exchange rate is more than 4 percent higher than projected in December, and a decline would be appropriate given the weakness in export prices," Wheeler said in his statement. "Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."

Most traders hadn't expected a cut until June because Wheeler's signals since the December statement had suggested he could look through one-off shocks such as the slump in crude oil prices. But today, he said the supply of commodities, especially oil, "has played an important part in lowering world commodity prices, successive downward revisions to the global growth outlook make it increasingly evident that weak demand is important."

"This contribution of weaker demand is a key reason why we expect commodity prices to be subdued for a sustained period," he said. "This is important for the prices of both New Zealand’s exports and imports."

Westpac Banking Corp chief economist Dominick Stephens says he expects a further cut to the OCR at the June MPS, lowering the benchmark rate to 2 percent.

Stephens said he was "slightly surprised" by today's move, even though Westpac has seen a cut as inevitable, because of the signals Wheeler had been sending that he wouldn't make a mechanical response to weak headline inflation, which was just 0.1 percent in 2015.

"Back in January we were actually forecasting that the RBNZ would cut at today's meeting," Stephens said. "But then the RBNZ governor gave a speech cautioning against focussing excessively on headline inflation. The strong language in that speech seemed to pour water on the idea of an imminent OCR cut. We became very uncertain about the timing of cuts, but in the end felt it was more likely that the RBNZ would hold off before actually moving. Not so - the Reserve Bank instead chose to move immediately."

Today Wheeler also lowered the forecast track to the 90-day bank bill rate, often seen as a proxy for the OCR, by half a percentage point over the next two years, implying another reduction is still to come.

"Headline inflation is expected to move higher over 2016, but take longer to reach the target range," Wheeler said. "Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."

BusinessDesk.co.nz

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