The export sector's hopes for a lower exchange rate were dashed yesterday after the Reserve Bank's 25-basis-point cut to the official cash rate sent the New Zealand dollar sharply higher.
The bank's decision to cut the rate to 2.0 per cent - its lowest since the bank introduced official rates in 1999 - drove the currency up by more than a US cent in the minutes after the decision, hitting US73.4c before easing to US72.38c later in the day.
Reserve Bank governor Graeme Wheeler said monetary policy would continue to be "accommodative" which was taken to mean at least one more cut was on the cards. He also said the high exchange was putting pressure on the export and import-competing sectors, and that a decline in the exchange rate was needed.
In more normal times, such action from the Reserve Bank would produce a fall in the exchange rate.
Analysts said although the bank's message was "dovish" - or soft on inflation - it was deemed by the market as being not dovish enough, and a reason to buy Kiwi dollars.
Expectations had crept in that it might move by 50 basis points - even though most of the market was sceptical. When that failed to materialise, the currency shot higher.
ANZ Bank senior economist Sharon Zollner said the currency's rally appeared to be "counter-intuitive" but that it nevertheless was a repeat what happened when the Reserve Bank of Australia cut its rate by 25 bp to 1.50 per cent on August 2.
"[Wheeler] probably knew that this was the most likely outcome, but nevertheless concluded that this was the best strategy," Zollner said.
"He was not going to be bullied into cutting by more than he thought was justified."
ANZ and some other banks now expect to see two more 25 bp rate cuts, in November and early next year.
Fonterra, NZ's biggest exporter, has complained that the currency has played a part in its low farmgate milk price of $4.25 a kg of milksolids - so yesterday's rate cut and higher kiwi would have offered little relief, although borrowers' interest rate costs may come down a little.