Dollar rises as rate cut meets expectations

Thursday 12th March 2009

The New Zealand dollar rose above 51 US cents for the first time in two weeks after the central bank cut its benchmark rate as expected and said the nation won't match other nations in driving borrowing costs to near zero.

Governor Alan Bollard said his 5.25 percentage points of cuts to the OCR, bringing the rate to a record low 3%, has taken interest rates to "very stimulatory levels." He predicts economic activity will trough by mid-year and the "rapid easing of monetary" will slow. "Any future cuts will be much smaller than observed recently" and New Zealand won't follow the US and U.K. in pushing its benchmark to near zero, he said in Wellington today.

"While the RBNZ reiterated significant stimulus from monetary conditions and fiscal policy, clearly there are concerns around the hitherto inability to stabilise the economy, let alone reflate it," said Shamubeel Eaqub, economist at Goldman Sachs JBWere. "Looking forward the ability to cut rates further is diminishing."

The kiwi rose to 51.13 US cents from 50.54 cents immediately before the RBNZ statement. It surged to 78.40 Australian cents from 77.77 cents and gained to 49.71 yen from 49.12 yen. The kiwi strengthened to 39.92 euro cents from 39.38 cents.

The central bank forecast inflation will subside to an annual rate of 3.1% in the March quarter, before sliding to a 1.9% annual rate in June, back within the central bank's 1% to 3% target band. Inflation was 3.4% in 2008.

The economy probably contracted 0.8% in the fourth quarter, and will likely extend its slump with a further 0.8% decline in the first three months of this year, Bollard forecast today. New Zealand is stuck in its first recession in a decade as unemployment rises, corporate earnings decline, and overseas demand for the nation's goods dwindles.

The easing of monetary policy, combined with the fiscal stimulus from the government and the rapid depreciation of the currency "will act to the support the New Zealand economy" which is projected to stop shrinking from the second half of the year, Bollard said.

He expects New Zealand "to perform better through this period than many of our trading partners" due to the strong position of New Zealand's banking sector, falling exchange rate, and early response to the global economic slump.

By Jonathan Underhill

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