Dollar slumps after central bank cuts OCR by 1.5%

By Paul McBeth

Thursday 29th January 2009

The New Zealand dollar tumbled, sinking below 52 US cents and slumping against its Australian counterpart, after the central bank cut its benchmark interest rate to a record low 3.5% and held out the prospect of more reductions.

Reserve Bank Governor Alan Bollard cut the official cash rate by 1.5 percentage points to 3.5%, citing "the decline in global growth and the ongoing uncertainty" in the economic climate. The New Zealand dollar dropped after the statement, having held relatively steady this week as investors waited for the decision.

"Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus," Bollard said in Wellington. The rapid global economic decline means the bank has a "more negative outlook for the terms of trade and exports, and tighter credit conditions."

The New Zealand dollar tumbled as low as 51.81 US cents and was recently at 52.22 cents, from 52.99 cents immediately before the statement. The kiwi declined to 78.64 Australian cents from 79.68 cents. It fell to 47.02 yen from 47.18 yesterday, and dropped to 39.27 euro cents from 40.42 cents.

Bank of New Zealand currency strategist Danica Hampton said the kiwi dollar may extend its decline to trade around 51.50 US cents. "Looking forward, the risk is to the downside," she said.

In July last year, Bollard embarked on the steepest series of cuts to the OCR since its inception in 1999, slashing the rate by 475 basis points as he moves to revive an economy that fell into recession last year. Any further reductions would be "smaller than those seen recently," he said today.

The RBNZ is in step with other central banks, including the Federal Reserve, which kept its benchmark rate at close to zero overnight and said it may buy US Treasury bonds to try to restore financial markets.

In New Zealand yesterday, Fonterra Cooperative Group, the world's largest dairy exporter, announced a worse-than-expected payout to dairy farmers to $5.10 per kilogram. Earlier this month, the average price of milk powder fell 9.3% in Fonterra's online auction to US$2,017 per metric ton, more than 50% lower than when the auctions began in July last year.

The New Zealand dollar will likely decline as the nation's major exporter commands lower prices overseas. Dairy products accounted for 22% of the country's $42.5 billion of exports in the 12 months ended October 31. The country's merchandise trade figures for the 12 months to December will be released later today.

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