New Zealand dollar falls as Reserve Bank shifts stance

The New Zealand dollar fell sharply on Thursday, bucking a major trend for weakness in the US dollar, after the Reserve Bank appeared much more dovish than expected in a policy statement that followed its interest rate announcement.

RBNZ kept its main cash rate at 3.5 per cent, but effectively dismissed any further rate increases in the accompanying statement by commenting only on the possible conditions that would compel it to lower rates and dropping its mention in last month's statement about "a period of stability in the official cash rate (OCR)".

While most other currencies were rallying strongly against the US dollar, the Kiwi dollar fell 0.9 per cent to $0.7612, having been as low as $0.7576. The US dollar was down 0.7 per cent, as measured against a basket of its major rivals.

New Zealand's central bank was the first among the developed nations to raise rates in this cycle, with its first quarter-point increase in March last year, followed by three further 0.25 percentage point increases in April, June and July. RBNZ stopped short of its intended target OCR of 4.5 per cent, however, as the NZ dollar strengthened and oil prices fell, forcing a drop in inflation.

"The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates," said Governor Graeme Wheeler in the statement, adding that it would be appropriate to lower the OCR if demand weakened and wages and price stability were to push inflation below its target range between 1 and 3 per cent. The country's annual rate of inflation stood at 0.1 per cent in the first quarter,

"RBNZ assistant governor John McDermott recently hinted at a slight shift in policy bias at the RBNZ and the statement today after its meeting certainly confirmed a shift from a more neutral stance to a bias to ease," said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.

As usual, Mr Wheeler took the opportunity to declare that the currency remained overvalued.

"The decline seems to have momentum and I would expect to see the NZ dollar continue to weaken," said Marshall Gittler at IronFX.

"However, over the medium term there is no indication that the NZ economy will fulfil the conditions that RBNZ set out for easing policy further. On the contrary, most indicators remain robust. So I do not think the weaker trend will continue indefinitely."

The Australian dollar drifted lower having reached a fresh three-month high of $0.8075 against the US dollar in the previous session. The Aussie fell 0.9 per cent against the dollar to $0.7932 and was down 1 per cent to Y94.31 against the Japanese yen.

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