Kiwi climbs as Bollard resumes rate hikes

Thursday 10th June 2010

The New Zealand dollar rose after Reserve Bank Governor Alan Bollard raised the official cash rate for the first time in three years and signaled further hikes as the economic recovery becomes broader based and inflation pressures grow.

Bollard raised the OCR by 25 basis points to 2.75% and said underlying inflationary pressures “are expected to increase” and it is “appropriate to gradually remove policy stimulus.” The bank forecasts inflation will spike to 5.3% next year on the back of increased GST and other charges. A gradual depreciation in the kiwi dollar “remains desirable,” helping lift export earnings and contributing to a rebalancing of the economy.

The currency had a rollercoaster ride overnight, before the MPS, gaining after reports that China will announce exports soared last month and Federal Reserve Chairman Ben Bernanke was upbeat about a global recovery. The kiwi ceded its gains after US stocks weakened on the U.S. probe into the Gulf of Mexico oil leak.

“The domestic economy is going along ok and the recovery is on track,” said Chris Tennent-Brown, economist at Commonwealth Bank of Australia.

He expects Bollard to hike rates by a quarter point at each meeting this year though he will be mindful of the risks from Europe and their potential to hamper bank funding, and may pause if that becomes problematic.

The New Zealand dollar jumped to 67.44 US cents from 66.49 cents late yesterday and surged to 81.29 Australian cents from 80.46 cents.

The kiwi gained to 61.58 yen from 60.77 yen and strengthened to 56.25 against the euro from 55.59. It rose to 46.37 British pence from 45.92 pence.

The trade-weighted index rose to 66.21 from 65.40.

The kiwi’s advance pushed the currency to the top of Tennent-Brown’s predicted range today of 66.50 US cents to 67.50 cents.

Bollard’s latest projections have the TWI steadily declining while Commonwealth Bank expects the currency basket to remain “reasonably strong.” Bollard reiterated today that higher lending costs and the increased number of people on floating-rate mortgages mean the tightening cycle won’t need to be as aggressive as in previous periods.

China is scheduled to release merchandise trade data for May today after a Reuters report cited sources saying exports surged 50% last month from the same period last year. That would outpace a forecast 32% gain in the month.

China is New Zealand’s No. 2 export market and its economic strength has helped shield both the New Zealand and Australian economies from the global downturn.

In Australia, the biggest export market, investors are awaiting employment figures today, which are expected to show that economy added 17,500 jobs last month, while unemployment was unchanged at 5.4%.

Businesswire.co.nz

Comments from our readers

No comments yet