UPDATE: NZ dollar soars as Wheeler cuts OCR to 2%

Thursday 11 August 2016 09:51 AM

UPDATE: NZ dollar soars as Wheeler cuts OCR to 2%, says further easing required

(Adds market comment, RBNZ forecasts for TWI, interest rates)

By Paul McBeth

Aug. 11 (BusinessDesk) - The New Zealand dollar soared more than 1 US cent after Reserve Bank governor Graeme Wheeler cut the official cash rate to 2 percent, as expected, and said further easing is required, still a less-dovish statement than some in the market had been expecting.

"Monetary policy will continue to be accommodative," Wheeler said in the statement. "Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data."

The kiwi rose as high as 73.41 US cents after the monetary policy statement was released, and was recently at 72.75 cents from 72.02 cents immediately before. The trade-weighted index rose as high as 77.28 and was recently at 76.85, from 76.21 before the statement.

Some traders were expecting a more definitive statement about further easing from a central bank trying to restrain a strong kiwi dollar that's preventing the economy importing inflation, although the MPS is broadly in line with economist expectations.

"We would have thought what they delivered was at least what the market had expected," said Imre Speizer, senior market strategist at Westpac Banking Corp. "It appears that the FX market informally had expected something over and above what interest rates had priced in. My suspicion would be that this reaction doesn't last."

The major risks to the Reserve Bank's central forecast would be if the exchange rate continues to trade above its projections or if inflation expectations continue to decline, both of which would need deeper cuts to the OCR, the MPS says.

The central bank has markedly increased its forecast track for the TWI in its latest statement and now sees it averaging 76 this quarter, from its previous forecast of 71, and then holding above 75 through the December 2016 to June 2017 quarters. In June it had expected the TWI to fall close to 70 over that period. It also lowered the track to the 90-day bank bill rate, seen as a proxy for the OCR, which it now expects to fall to 1.8 percent over its forecast horizon, from a previous low of 2.1 percent.

"We continue to expect the RBNZ to cut once further, in November, when the RBNZ has received the next set of key economic data and comprehensively redone its forecasts," said Nick Tuffley, chief economist at ASB Bank. "Weaker than expected data or persistent NZD strength could bring easing forward to September."

Today, Wheeler said the high exchange rate was "adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector."

"This makes it difficult for the bank to meet its inflation objective. A decline in the exchange rate is needed," he said.

Still, New Zealand interest rates remain high relative to those in other major developed economies, limiting the effectiveness of the RBNZ's policy levers.

"Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate," Wheeler said today. "Global growth is below trend despite being supported by unprecedented levels of monetary stimulus. Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.."

He said the prospects for global growth and commodity prices "remain uncertain" and "political risks are also heightened".

Wheeler had signalled a rate cut was imminent when he made an unexpected statement last month that "further easing was likely" as a strong currency made it hard for him to meet the mandated target of keeping inflation between 1 percent and 3 percent over the medium term. Consumer prices rose an annual 0.4 percent in the June quarter, its seventh quarter below the band with the strong kiwi's deflationary effect being compounded by last year's slump in oil prices.

The Reserve Bank has been reluctant to cut the official cash rate too far for fear of further inflaming a housing market that's threatening financial stability in a world where rates are near zero. The announcement of new loan-to-value ratio restrictions for banks and the unscheduled economic update raised expectations the RBNZ would try to talk down the currency and signal more rate cuts.

(BusinessDesk)

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