Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


RBNZ caught in signalling dilemma as kiwi shines

RBNZ caught in signalling dilemma as kiwi shines in world hungry for positive carry

By Jonathan Underhill

July 18 (BusinessDesk) - The Reserve Bank will probably raise the official cash rate again on July 24 while trying not to polish the appeal of a New Zealand dollar that stands out in a world where most central banks have record low interest rates.

Governor Graeme Wheeler will lift the official cash rate a quarter point to 3.5 percent, according to the consensus of 16 economists in a Reuters survey.

What he does after that has become the subject of considerable speculation, given dairy prices have continued to plummet, inflation is tamer than expected and the housing market may not be getting as steamed up as feared. Westpac Banking Corp chief economist Dominick Stephens yesterday said next week’s hike may be the last for the year, having previously predicted another increase in December.

“When it comes to the OCR outlook, the RBNZ will attempt to find a way of clearly signalling a pause, while reaffirming the overarching message that the OCR will rise gradually over the coming years,” Stephens said in an OCR preview titled ‘Cat among the pigeons’.

Wheeler will want to do that without sending any signals to the housing market that mortgage rates could ease, especially as he assesses the impact of strong inbound migration. He’s likely to keep a wary eye on housing even as Real Estate Institute data points to some cooling in demand in the face of the bank’s restrictions on low-equity loans.

New Zealand’s central bank isn’t alone in raising interest rates this year but among the 10 other nations to lift borrowing costs, only Malaysia has a sovereign credit rating above BBB and half of them – Ukraine, Egypt, Indonesia, Ghana and Georgia - don’t have an investment-grade rating.

At 3.5 percent, the official cash rate will be more than 3 percentage points higher than central bank rates in the US, Japan and Europe, and 1 percentage point above Australia’s, giving the kiwi dollar what is known as a ‘positive carry.’

“The higher than expected NZD puts the RBNZ between the rock and a hard place,” said ASB economist Christina Leung. “Interest rate differentials are still supporting the NZD at a high level. The RBNZ has a tough choice between going ‘soft’ on the OCR to reduce pressure on the NZD against keeping up some transmission of a higher OCR to term rates.”

Comments this week from Federal Reserve chair Janet Yellen, deemed to be a tad more upbeat than expected about the US economy, weaker dairy prices and New Zealand second-quarter inflation data showing a more benign rate for the non-tradable economy drove a sharp sell-down in the kiwi. The currency was recently at 86.54 US cents compared to 88.07 cents on Tuesday. The trade-weighted index was at 80.65, down from 81.81.

In its June monetary policy statement, the Reserve Bank predicted the TWI would decline by about 7 percent over the next three years as the decline in commodity prices begins to be reflected in the currency

Westpac’s Stephens says the central bank may consider intervening in the currency market by selling the kiwi, once next week’s review is out of the way.

“This would address the real nub of the Reserve Bank’s current problem – that the exchange rate refuses to fall even as export conditions are deteriorating,” Stephens said. Any intervention would likely come at a time sentiment was already negative for the kiwi to maximise the impact.

Market consensus still suggests a pause in OCR hikes after next week until December, based on the latest Reuters polling of 16 economists, unchanged from its June 12 survey, even though Westpac, ANZ Bank New Zealand, Goldman Sachs and the NZ Institute of Economic Research see no further increase this year. The survey shows the rate rising to 3.75 percent in December, 4 percent by March and 4.25 percent by June next year.

(BusinessDesk)

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Scoop Business:
NZ Puts Seven New Oil And Gas Areas Put Up For Tender

A total of seven new areas will be opened up to oil and gas exploration under its block offer tendering system, as the New Zealand government seeks to concentrate activity in a few strategically chosen areas. More>>

ALSO:

Half Full: Dairy Payouts Steady, Cash Will Be Tight

Industry body DairyNZ is advising farmers to focus on strong cashflow management as they look ahead to the 2015-16 season following Fonterra's half-year results announcement today. More>>

ALSO:

First Union: Cotton On Plans To Use “Tea Break” Law

“The Prime Minister reassured New Zealanders that ‘post the passing of this law, will you all of a sudden find thousands of workers who are denied having a tea break? The answer is absolutely not’... Cotton On is proposing to remove tea and meal breaks for workers in its safety sensitive distribution centre. How long before other major chains try and follow suit?” More>>

ALSO:

Scoop Business: NZ-Korea FTA Signed Amid Spying, Lost Sovereignty Claims

A long-awaited free trade agreement between New Zealand and South Korea has been signed in Seoul by Prime Minister John Key and the Korean president, Park Geun-hye. More>>

ALSO:

PM Visit: NZ And Viet Nam Agree Ambitious Trade Target

New Zealand and Viet Nam have agreed an ambitious target of doubling two-way goods and service trade to around $2.2 billion by 2020, Prime Minister John Key has announced. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news