NZ dollar drops to 11-month low after rate cut

Thursday 11th September 2008

New Zealand's dollar fell to the lowest in 11 months after the central bank cut its benchmark rate by twice the amount economists had expected, reducing the currency's appeal as a high yielder.

The kiwi dollar fell as low as 65.54 US cents after the bank's statement, from about 66.26 cents immediately before. It fell to 81.82 Australian cents from 82.62 cents and declined to 70.50 yen from 71.20 yen.

Reserve Bank Governor Alan Bollard cut the official cash rate by a greater-than-expected 50 basis points to 7.5%, saying the economy is "experiencing a marked slowdown" while the global outlook has deteriorated. The economy probably has shrunk for three straight quarters, the Treasury said this week, falling into its first recession since 1998.

Bollard cut the OCR for the first time in five years in July and said further cuts would depend on the currency not falling excessively and the track of inflation peaking as expected in the third quarter. Today he said the weakening economy would bring inflation back within his 1% to 3% target range by the first quarter of 2010.

"The RBNZ was clearly prepared to take the risk that surprising the market could generate another bout of currency weakness," said Robin Clements, senior economist at UBS New Zealand.

"The RBNZ will continue to ease at each opportunity" until the OCR reaches 6.75% in January 2009," he said.

A weaker currency provides a boon for exporters and manufacturers such as Fisher & Paykel Appliances, which closed plants in New Zealand and moved operations to lower-cost centres such as Thailand, and to major markets in Europe and the US.

F&P Appliances stock rose 1.7% to NZ$1.82 today. The benchmark NZX 50 Index rose 1.2% to 3383.66.

"The move today should be positive for sentiment, equities and should see repricing of more aggressive rate cuts in the exchange and interest rate markets," said Shamubeel Eaqub, economist at Goldman Sachs JBWere.

By Jonathan Underhill

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