NZ dollar climbs 0.7% as Bollard backs off jawboning currency, keeps OCR on hold

By Paul McBeth

Jan. 26 (BusinessDesk) – The New Zealand dollar gained as much as 0.7 percent after Reserve Governor Alan Bollard steered clear of talking down the currency and held the official cash rate at a record-low 2.5 percent.

Bollard kept the OCR on hold, saying global financial markets are still threatening to push up local bank funding costs, and New Zealand’s economic recovery may be constrained by delays to the Christchurch rebuild. He said recent gains in the currency were holding down returns on elevated commodity export prices

The kiwi rose as high as 81.94 US cents, the highest level since Oct. 31, from 81.38 cents immediately before the announcement, and recently traded at 81.66 cents.

Currency traders were expecting Bollard to take a harder line on the appreciation in the kiwi, which had already spiked higher after the US Federal Reserve pushing out the timeframe for its near-zero interest rate monetary policy until the tail-end of 2014.

“What was surprising to some was the lack of concern about the New Zealand dollar, which is 7 percent higher than the previous forecast on a TWI (trade-weighted index) basis,” said Mike Jones, currency strategist at Bank of New Zealand. “People expected some hand-wringing and jawboning in an attempt to bring down the dollar.”

Bollard’s decision to keep the OCR on hold was widely expected by market economists, who don’t expect a rate hike until late this year or early 2013. Traders are betting on a rate cut as an outside chance in the coming year, pricing in a 5 basis point reduction to the benchmark interest rate over the next 12 months, according to the Overnight Index Swap curve.

“Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold,” Bollard said in a statement. The international climate has “improved slightly” but the global economy is still “fragile and risks to the outlook remain,” he said.

Europe’s debt crisis has pushed up international borrowing costs, and Bollard warned that “will likely pressure funding costs for New Zealand banks over the coming year.”

Last month the Reserve Bank said higher bank funding costs were a “particular concern” as they could raise the cost of borrowing for households and firms independent of changes to the OCR.

“The difference of opinion between the RBNZ and market pricing (which suggests hikes delayed until well into next year) will probably not be resolved until later in the year, as we get more resolution on reconstruction and Europe,” Westpac Banking chief economist Dominick Stephens and economist Michael Gordon said in a note.

“The global situation remains tenuous, so for a typically conservative central bank to acknowledge some improvement is actually a meaningful bit of information about the RBNZ's thinking,” they said.

Bollard said New Zealand’s economy is showing modest growth, with limited recovery in consumer spending and the housing market.

Real Estate Institute figures showed a pick-up in house sales last month, though they are still at subdued levels, while the latest ANZ Roy Morgan Consumer Confidence survey found respondents to be buoyed by the summer season.

“Repairs and construction in Canterbury will also provide a significant boost for an extended period, though there may be further delays resulting from the aftershocks,” he said.

Any fears Bollard had about inflationary pressures were quelled by last week’s consumers price index, which unexpectedly fell 0.3 percent in the final three months of last year, taking the annual pace of inflation to 1.8 percent. That figure was the first to wash through the impact of the government’s hike in consumption tax in 2010, which boosted the headline number by about 2 percentage points.

Bollard said “inflation pressures have remained well contained,” and is now sitting below 2 percent, the middle of his target band between 1 percent and 3 percent.

The Reserve Bank backed away from tighter monetary policy last year after the US had its credit rating downgraded when legislators hit a deadlock over lifting the nation’s debt cap, and Europe’s sovereign debt crisis escalated, threatening global economic growth.

Prime Minister John Key will give a speech in Auckland today outlining how the government sees the local economy, and is expected to give an update on whether his administration’s target to return the books to surplus by 2014/15 is still within reach.

Today’s statement comes after the US Federal Reserve extended the likely timeframe for its near-zero interest policy until late 2014. The Federal Open Market Committee said it expects modest economic growth, and a gradual decline in the elevated rate of unemployment.

Last month, the Reserve Bank reined in its forecast track for the 90-day bank bill, often seen as a proxy for the OCR, and said “monetary policy is projected to remain supportive for some time.” The bank forecast the 90-day bank bill gradually rising through the second half of this year before settling at 4 percent in September 2013.

That trimmed 30 basis points from the top of the forecast, and removed a sharp increase in the June quarter next year. Bollard had already pushed out the prospect of rate hikes and trimmed the top of the 90-day bank bill forecast in the September monetary policy statement.

(BusinessDesk)

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