NZ dollar tumbles despite interest rates hike

Photo / Dean Purcell

The New Zealand dollar tumbled after Reserve Bank Governor Alan Bollard said interest rate increases will be more moderate than he had previously flagged and said the currency's strength is inconsistent with the weaker economic outlook.

Bollard raised the official cash rate a quarter point to 3 per cent today, as expected, and said subdued domestic demand and a fragile global recovery meant further increases to the OCR would probably be less aggressive than was anticipated in the June 10 Monetary Policy Statement.

The kiwi dollar had climbed more than 9 per cent from its lows of early June and Bollard said this was "inconsistent with the softening in New Zealand's economic outlook and moderation in our export commodity prices."

The immediate kiwi dollar sell-off following the announcement reflected market expectations that the Reserve Bank would push the OCR as high as the expected 6 per cent by around September 2012 were now "somewhat diminished," said Bank of New Zealand head of research Stephen Toplis. "Relative to the starting point, we are talking lower interest rates."

The New Zealand dollar dropped to 72.09 US cents from 72.66 cents immediately before the central bank's statement and down from 72.99 cents late yesterday. The trade-weighted index, or TWI, fell to 67.44 from 68.01.

The kiwi fell to 80.86 Australian cents from 81.36 cents, having jumped up by a similar amount yesterday when figures showed Australia's consumer price index rose a less-than-expected 0.6 per cent in the second quarter, reducing the need for the RBA to hike rates aggressively.

Australia's central bank held its cash rate unchanged at 4.5 per cent this month and with today's move by the RBNZ, the gap with the OCR narrowed to 1.5 percentage points.

New Zealand's dollar fell to 63.04 yen from 63.55 yen before the RBNZ statement and down from 64.23 yesterday. It fell to 55.48 euro cents from 55.94 and weakened to 46.23 British pence from 46.64 pence.

Among signs that the economic recovery has lost some puff, Business confidence weakened for a third straight month, according to the National Bank Business Outlook released yesterday, with firms seeing smaller profits and reducing plans to hire more workers.

Annual inflation was a mild 1.8 per cent in the second quarter though the rate is expected to spike to more than 5 per cent next year with the impact of an increase in goods and services tax, ACC charges and the Emissions Trading Scheme.

Bollard today reiterated his view that the charges won't have a lasting impact on inflation.

"The bank does not expect this price spike to have a lasting impact on inflation," Bollard said. "However, the price and wage setting behaviour of firms and households will be monitored for evidence of any increase in inflation expectations."

Further evidence of the strength of New Zealand's trading position are due later this morning, with the release of merchandise trade for June, which is expected to show a surplus of $350 million for the month and an annual surplus widening to $720 million from $90 million.