NZ dollar jumps on Bollard's hint of early rate hikes

Thursday 10th December 2009

The New Zealand dollar jumped more than half a cent after Reserve Bank Governor Alan Bollard hinted he would raise interest rates early than expected as the country’s economy bounces back faster than he anticipated.

The central bank kept the official cash rate at a record-low 2.5% as expected, though Bollard said he might begin removing “stimulus around the middle of 2010,” and dropped his line that rates wouldn’t move until the second half of next year. New Zealand climbed out of recession in the second quarter of this year after its first prolonged contraction in a decade, and the Reserve Bank expects growth to be “relatively strong” over the next 12 months. The country’s recovery has been underpinned by returning expatriates and an inflow of migrants stoking demand for property amid a shortage of listings.

“The Reserve Bank’s been spooked by the recent increases in house prices and is a little bit concerned by the non-tradable inflation outlook,” said Danica Hampton, currency strategist at Bank of New Zealand. “The kiwi jumped after Reserve Bank’s statement was much more hawkish than people were expecting.”

The New Zealand dollar jumped to 71.87 U.S. cents from 71.22 cents immediately before the statement and was at 71.05 cents yesterday, and it advanced to 64.47 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 63.72 yesterday. It gained to 63.18 yen from 62.18 yen yesterday, and increased to 79.06 Australian cents from 78.26 cents. It rose to 48.82 euro cents from 48.19 cents yesterday and climbed to 44.20 pence from 43.62 pence.

Hampton said the currency may trade between 71.50 U.S. cents and 72.50 cents today after the central bank’s upbeat assessment of the economy stoked investors’ appetite for kiwi. Bollard said the currency was “looking less out of line than it has” at a media conference after his statement. The central bank Governor has repeatedly voiced his frustration over the strength of the kiwi dollar, which is out of his control, which has inhibited his desired export-led recovery.

The U.S. dollar was sold off yesterday amid rumours of selling by sovereign accounts, though the impact of this was limited after Standard & Poor’s put Spain’s credit rating on a negative outlook, while the U.K. government’s pre-budget announcement stressed the dire state of the country’s accounts.

Businesswire.co.nz

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