NZ dollar falls ahead of RBNZ review; Fed hikes key rate

Thursday 27th September 2018

The New Zealand dollar lifted after central bank Governor Adrian Orr kept rates on hold and was slightly more upbeat without taking a possible rate cut off the table.

"We expect to keep the official cash rate at this level through 2019 and into 2020. The direction of our next OCR move could be up or down," Orr said in a one-page statement.

The wording was virtually identical to the prior statement in August although he was more optimistic about economic growth after GDP surprised to the upside in the June quarter.

"Our outlook for the OCR assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target mid-point," he said. "Domestically, ongoing spending and investment, by both households and government, is expected to support growth." In August, Orr signaled that a recent moderation in growth could last longer and could trigger a rate cut.

The kiwi traded at 66.60 US cents at 11am, having jumped as high as 66.94 cents, versus 66.54 cents prior to the statement.

"The New Zealand dollar is slightly higher on no step-up in dovish language that we saw in August, and some of the downside growth lines removed," said Ross Weston, a senior trader at Kiwibank.

Annette Beacher, chief Asia-Pacific macro strategist for TD Securities, said she had expected Orr to emphasise low inflation and weak business confidence but close inspection of the statement reveals a "rather constructive view of current conditions and relatively upbeat view on the outlook, albeit with risks associated with trade tensions."

In the statement, Orr said that "trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth."

Beacher said she doesn't think a rate cut is appropriate as wage and inflation pressures are increasing. She expects the central bank to begin lifting rates in November 2019 and sees the cash rate at 2.25 percent at the end of 2020.

While the kiwi got a lift from the statement, both Weston and Beacher said it would come under pressure as the rate differential between the US and New Zealand widens.

Earlier, the US Federal Reserve lifted its benchmark interest rate to 2.25 percent, 50 basis points above that of New Zealand. It has another hike forecast this year and three in 2019.

Also, ANZ Bank Chief Economist Sharon Zollner said a New Zealand rate cut was still possible, which would widen the differential even further.

"The RBNZ stands ready to act should economic activity disappoint. All eyes will be on the degree of economic momentum into the end of the year," she said.

"While strength in GDP growth in the June quarter is positive, we continue to view a cut in the OCR as more likely than a hike, on balance," she said.

(BusinessDesk)

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