NZ Herald business editor at large

Liam Dann: Rate cut, dollar rise...mad world


In a normal world lower rates are supposed to mean a lower dollar.

But despite a 0.25 cash rate cut to a record low of 2 per cent - and a clear signal that there is at least one more cut to come - our dollar shot up to hit a 15 month high above US73c today.

It's mad world.

New Zealand still has the highest interest rates in the Western world and frankly still looks like a safe currency bet compared to our peers.

Reserve Bank cuts Official Cash Rate to 2 per cent

Australian rates are down to 1.5 per cent and its Reserve Bank got the same disappointing reaction last month - it cut rates and saw the dollar rise.

Banks in Australia didn't even pass that cut on. Some New Zealand banks have, partially, but the rising cost of borrowing offshore puts a limit on what they can do for mortgage holders.

So we won't get much economic stimulus from lower mortgage rates, and we got no drop in the dollar. What was the point of a cut?

Central banks all over the world are now cutting rates to hold ground - and not even managing that.

As rates get closer to zero the power to move markets wanes.

New Zealand and Australia are in danger of heading for similar territory to the US and Europe. As rates get closer to zero the power to move markets wane.

That's a reason for our Reserve Bank to stay cautious and resist the temptation to chase the market with ever deeper cuts.

Reserve Bank Governor Graeme Wheeler wasn't thrilled by currency market reactions but wasn't surprised. He knows that a more aggressive stance is needed to appease the market. But he has opted to stick to a steady course. This is a good call.

Our economy isn't collapsing. In fact its global appeal for investors is part of the problem.
Nobody knows how low New Zealand will eventually have to go to get traction on the dollar or get a lift in inflation.

What we really need is for US Federal Reserve to start lifting rates so the American dollar rises.

Markets are now picking that won't be until at least late-2017 or 2018.
If that's the case then Wheeler is wise to keep some fire-power in reserve.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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