Dollar tumbles after RBNZ says 'rates out of line'

By Paul McBeth

Wednesday 1st April 2009

The New Zealand dollar tumbled more than one US cent as the Reserve Bank said interest rates are out of line with the monetary policy outlook, and could put unnecessary pressure on borrowing.

Central bank Governor Alan Bollard expressed his concern over the strength of long-term wholesale interest rates in a statement today. He said the levels were "unwarranted and inconsistent" with monetary policy outlook, with rates projected to be relatively low for an extended period.

"The markets had stepped too far and got carried away," said Tim Kelleher, vice president of institutional banking and markets at the Commonwealth Bank of Australia. Bollard made the move to stop "mums and dads from panicking" that rates were getting too high, he said.

The kiwi slumped to 56.03 US cents from 57.05 cents immediately before the announcement, falling as low as 55.89 cents. It traded at 56.92 cents yesterday. It fell to 42.22 euro cents from 42.80 cents before the announcement, and declined to 55.34 yen from 56.47 yen before the statement.

Kelleher said the currency may trade between 55.50 US cents and 57.50 cents, with pressure on to break its bottom level and sink as low as 54.50 cents.

The kiwi tumbled to 80.81 Australian cents, from 81.81 cents immediately before the announcement and has declined from 82.54 cents yesterday.

Reserve Bank of Australia Deputy Governor Ric Battellino told an urban development conference yesterday that gross domestic product is "likely to fall in 2009" for the first time in almost two decades.

Speculation the RBA would pause on cutting interest rates next week was sparked following an article by commentator Terry McCrann.

If the RBA hold rates next week it "will put pressure on the Reserve Bank of New Zealand which has to deal with too-high currency and wholesale interest rates," said Imre Speizer, strategist at Westpac Banking Corp.

The RBNZ will review the official cash rate on April 30, and may slash interest rates a further 50 basis points, said Speizer. The central bank has cut 5.25 percentage points since July, taking the OCR to a record 3% since its inception in 1999.

Bollard expects the benchmark rate will trough between 2% and 2.5% mid-way through this year, but he hasn't indicated how long he will keep rates low.

Traders will be watching Fonterra's online auction tomorrow, with the New Zealand currency linked to the price of raw materials. Milk powder prices are looking "fairly strong," said Speizer, and the Reuters Jeffries CRB Futures Price Index, a broad measure of the price of raw materials, rose 2.5%.

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