New Zealand dollar falls on rate brush-off

The New Zealand dollar fell on Thursday after a central bank policy maker surprised the market, saying a rate rise was not currently under consideration.

John McDermott, the Reserve Bank of New Zealand's assistant governor, pointed to what he called temporary factors behind the country's near-zero inflation rate, including low oil prices, which he said "drop out of the annual inflation rate by the start of next year".

"At present, the Bank is not considering any increase in interest rates. Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation," Mr McDermott told the Waikato Chamber of Commerce and Industry.

The speech, which was entitled "The dragon slain? Near zero inflation in New Zealand" undermined speculation that a rate rise looked likely to follow robust economic growth helped by growing demand from Asia for the country's agricultural products and a strong domestic property market.

New Zealand's benchmark interest rates are among the highest in the developed world at 3.5 per cent, making its dollar appealing as a destination currency in carry trades, when investors seek profit by borrowing in weaker currencies and invest in equivalent ones paying better interest rates.

The relatively brighter outlook for its currency since the start of the year has helped it appreciate toward parity with the traditionally more valuable Australian dollar, as the bigger Antipodean nation's mineral exports to China slowed. Earlier this month, the New Zealand dollar reached its highest level against its neighbour since it floated freely in 1985, at A$0.9908.

But after Mr McDermott's remarks on Thursday, the kiwi weakened by 0.8 per cent to A$0.9920.

"Markets have been preoccupied by the possibility of parity in the New Zealand and Australian dollars, and while this number has had some magnetism attached to it, every time we have approached the figure, something fundamental has driven us away once again," said Daniel Been, analyst at ANZ Research.

"We have previously highlighted that we think the differing central bank biases remain the key differentiator in the market's view of the Aussie and the kiwi. If this is beginning to narrow, this is important."

Against the US dollar, the kiwi fell by as much as 1.5 per cent to A$0.7546.

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