NZ dollar tumbles after dovish MPS, hint at policy response to high currency

The New Zealand dollar tumbled almost 1 US cents after the Reserve Bank said interest rates will remain at a record low through this year and hinted at a cut to the official cash rate if the currency was higher than justified by economic fundamentals.

The kiwi fell to 81.66 US cents from 82.60 cents immediately before the statement. The trade-weighted index fell to 75.43 from 76.21. The kiwi fell to 79.32 Australian cents from 80.15 cents.

Governor Graeme Wheeler raised his forecast track for the TWI and now sees it staying above 75 until the June quarter next year, having previously seen it falling below 73 by the end of this year. “If the exchange rate rose for reasons not justified by New Zealand’s economic fundamentals, all other things equal, this would lead to a lower-than-expected OCR,” he said in the overview and key policy judgements section of today’s statement.

“The big surprise was the new emphasis on the impact of a high kiwi dollar,” said Imre Speizer, senior markets strategist at Westpac Banking Corp. “If it continues higher they will even think about cutting rates. We haven’t heard that before.”

The Reserve Bank kept the official cash rate at 2.5 percent, as expected in today’s review. It said the kiwi dollar has climbed to levels that don’t match the underlying economic conditions, and those periods can be protracted, the bank said. Some of that strength has been attributed to the central bank’s firmer policy stance.

“Though the New Zealand dollar also reflects high terms of trade and recent improvements in market sentiment, the relative performance and outlook of the domestic economy have contributed to New Zealand interest rates being higher than in most trading partners and the New Zealand dollar remaining persistently elevated,” the bank said.

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