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Category: Money and Monetary Policy / Currency / Economic Trends

RBNZ slashes interest rates, Kiwi flies

Thursday, 11 Aug 2016 07:44:19 | Peter Ryan

New Zealand's currency has surged despite a rate cut by the central bank. (Supplied: nzraw.co.nz)

New Zealand is the latest developed economy to join the low rates club with its central bank cutting the benchmark rate by 0.25 per cent to 2 per cent.

The Reserve Bank of New Zealand (RBNZ) met market expectations by delivering a rate cut and flagged that more monetary policy easing might be needed.

However, some traders were clearly expecting the RBNZ to cut harder, with the Kiwi dollar taking off as soon as the decision was announced.

The New Zealand dollar jumped about 0.75 per cent against the Australian dollar, meaning one Aussie dollar was only buying $NZ1.06 by 9:20am (AEST).

The "Kiwi" also jumped against the greenback and other major currencies, posing headaches for RBNZ governor Graeme Wheeler, who desperately wants a lower currency.

NZD surges at the moment RBNZ decision announced Photo: $NZ jumped when the rates decision was announced. (Bloomberg)

Echoing concerns of Australia's Reserve Bank, Mr Wheeler said the New Zealand currency was being pushed uncomfortably high as investors search for yield in a low rates world.

"The high exchange rate is adding further pressure to the export and import competing sectors," Mr Wheeler observed in his statement.

"This makes it difficult for the bank to meet its inflation objective.

A decline in the exchange rate is needed.

The RBNZ said global growth is "below trend" despite unprecedented levels of stimulus in the wake of the global financial crisis.

"The prospects for global growth and commodity prices remain uncertain," Mr Wheeler warned in his statement.

"Political risks are also heightened."

More home loan controls on the way

The RBNZ has another challenge similar to Australia's RBA in lowering interest rates - managing the rising risks of a housing bubble in the hot market of Auckland.

While the RBNZ has already introduced macro prudential measures to mitigate risks from escalating house prices, Mr Wheeler signalled there could be more to come.

House price inflation remains excessive and has become broad-based across the regions.

"The bank is consulting on stronger macroprudential measures."

The RBNZ is also hoping the rate cut will help the dairy industry, where low prices are continuing to depress incomes in the sector.

New Zealand's main rate was first cut from a recent peak of 3.5 per cent in June 2015 as the central bank's attempts to rein in the currency and support the dairy sector.

Follow Peter Ryan on Twitter @peter_f_ryan and on his Main Street blog.

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