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NZ dollar pares gain after RBNZ flags milder rate hikes in tightening cycle

Thursday 29th April 2010

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The New Zealand dollar pared gains against the greenback after Reserve Bank Governor Alan Bollard said the widening spread between lending rates and the official cash rate meant increases in the OCR would be milder than in previous tightening cycles.  

Bollard kept the OCR at a record-low 2.5% in his review today, and signalled higher interest rate are on track to be delivered “over the coming months,” with economic growth tracking in line or ahead of forecasts. He said the “wedge” between the OCR and lending rates, where banks have been forced to boost mortgage rates as their own cost of funding has increased, will “reduce the extent to which the OCR will need to be increased” compared to past tightening cycles.

“The RBNZ has given itself room to manoeuvre, still leaving a lot of wriggle room with its signal it expects to begin removing stimulus over coming months,” said Nick Tuffley, chief economist at ASB. While the wording has been tweaked in the latest statement, “effectively that signal is still “around the middle of 2010.”

The kiwi dropped to 71.79 US cents from 72.02 cents immediately before the announcement, and was at 71.44 cents yesterday, while the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, fell to 67.06 from 67.37 before Bollard’s statement, and was at 66.92 yesterday.

The kiwi rose to 67.57 yen from 67.05 yen yesterday, and climbed to 54.40 euro cents from 54.15 cents. It gained to 47.21 pence from 47.06 pence, and was little changed at 77.63 Australian cents from 77.68 cents.  

Mike Jones, strategist at Bank of New Zealand, said the currency will probably trade between 71.10 US cents and 72.20 cents today, with more bias to the downside.  

He said Bollard will be more likely to begin hiking rates in July with a glut of data in June likely to give it the impetus to move.  “The household labour force survey next week is going to be critical, but the balance of risks is to a July move to give him (Bollard) that much more time to assess the data,” he said.  

Jones said the kiwi will come under pressure against the Australian dollar, with investors picking another rate hike by the Reserve Bank of Australia next week after faster than expected inflation data across the Tasman.  

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