The New Zealand dollar yesterday surged to its highest level in more than a year after the Reserve Bank of New Zealand (RBNZ) made smaller interest rate cuts than some had expected, forcing them to unwind their bets on more aggressive easing.
The bank said that a higher exchange rate was driving it to lower rates and that it saw potential for one more rate cut by the end of the year and then another by the middle of next year.
Traders said that was too slow relative to expectations, with some going into yesterday’s meeting expecting a 50 basis point cut.
As a result, the New Zealand dollar rose to US$0.7351, its highest level since May last year, before settling back to US$0.7275, up 1.2 percent on the day.
The bank yesterday cut interest rates a quarter of a point to a record low of 2 percent and flagged the need for more as it struggles to head off deflation risks.
“The RBNZ has made it clear for a long time that it wants to see the [New Zealand dollar] to depreciate, sometimes less and sometimes more explicitly,” said Ulrich Leuchtmann, currency strategist at Commerzbank. “Only that it does not deliver enough to achieve this.”
After saying in his policy statement that a decline in the New Zealand dollar “is needed,” RBNZ Governor Graeme Wheeler said at a news conference in Wellington that the central bank had “very limited influence” over the exchange rate.
He also said he had not given serious consideration to a half-point reduction because it was not warranted and, in a “normal” situation, the RBNZ would probably be raising rates to cool the rampant housing market.
Along with the Australian dollar, the New Zealand dollar has been buoyed by the allure of its relatively high bond yields. New Zealand dollar 10-year government bonds have a yield of about 2.1 percent, compared with negative yields in Japan and Germany.
“At the moment we’re really in a super-charged market when it comes to high-yielding currencies... Everyone’s looking for an opportunity to buy,” said Steven Dooley, currency strategist for Western Union Business Solutions in Melbourne, Australia.
New Zealand has kept its interest rates higher than many developed nations as it seeks to avoid adding more fuel to a runaway housing market.
Wheeler made some of his toughest comments yet on housing, calling the rise in prices “excessive” and a risk to financial stability.
The bank has introduced certain loan requirements to try and curb speculation and is considering further action.
Wheeler also said in many ways the New Zealand economy is quite healthy compared with other developed nations, with GDP expected to grow by about 3.5 percent over the next two years.
Unemployment is 5.7 percent, while inflation is 0.4 percent, below the central bank’s target of between 1 and 3 percent.
Opposition political parties say the rosy figures mask an economy that is being propped up by high immigration and an unsustainable housing boom.
Additional reporting by AP
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