High dollar accented as OCR stays steady

Tony Conroy
Tony Conroy
Reserve Bank governor Alan Bollard focused on the high value of the New Zealand dollar yesterday as he kept the official cash rate at 2.5%.

Economists had forecast it to remain unchanged but Dr Bollard caught many by surprise with his strong comments on the currency.

Policy actions from several central banks had boosted global confidence, he said.

The easing in global monetary policy and resultant recovery in risk appetite had contributed to a marked appreciation in the New Zealand dollar.

"While helping contain inflation, the high value of the New Zealand dollar is detrimental to the tradeable sector, undermines GDP growth and inhibits rebalancing in the New Zealand.

"Sustained strength in the New Zealand dollar will reduce the need for future increases in the OCR," Dr Bollard said.

Craigs Investment Partners broker Chris Timms said financial theory usually dictated that if Dr Bollard raised interest rates, the dollar would also rise.

"It looks like while he still has a focus on inflation, he is assuming the high dollar will have a major impact on inflation."

The Reserve Bank pointed to the domestic economy showing signs of recovery, Mr Timms said.

Household spending appeared to have increased in the past few months and building activity appeared to be recovering.

Dr Bollard said the recovery would strengthen as repairs and reconstruction in Canterbury increased later in the year.

High export commodity prices were also helping a recovery in domestic activity.

Westpac Dunedin private financial adviser Tony Conroy said the Reserve Bank statement was bullish on growth but dovish on inflation.

"Consequently, the outlook for 90-day rates was softened materially. The Reserve Bank still appears to be signalling an OCR hike around the end of this year. But beyond that, the interest-rate forecast rises at a pace of only one OCR hike per year."

The Reserve Bank was telling a consistent story but Mr Conroy said it would be a tough sell for markets.

Monetary policy had been in the same situation before.

In 2003, the Reserve Bank eschewed responding to the improving domestic economy for fear of further stoking an overvalued exchange rate.

In the end, rising house prices fuelled domestic inflation and the OCR ended up going much higher than markers or the central bank anticipated, he said.

"We continue to believe that an extended series of OCR hikes will be necessary to rein in domestic inflationary pressures arising from the Canterbury rebuild, even in the face of a strong exchange rate," Mr Conroy said.

On Tuesday, the Reserve Bank of Australia held interest rates steady because its expected growth would be close to trend and inflation close to its target 2% to 3% range. However, it promised to cut rates "should demand conditions weaken materially".

The RBA left its cash rate at 4.25%. It cut the rate by 0.25% last November and December.

Governor Glenn Stevens said underlying inflation was about 2.5% and headline consumer price inflation would fall further over the next quarter or so.

The European Central Bank is expected to keep its interest rates on hold today and signal it has played its part in fighting the euro-zone crisis after unleashing a dramatic sweep of measures that unsettled some at the bank.

ECB president Mario Draghi is likely to put the onus on governments to fight the crisis now after the central bank pumped more than 1 trillion ($NZ1.61 trillion) into the euro zone banking system in the past two months.

The ECB cut rates twice last year to 1% and is likely to hold it at that level.

- dene.mackenzie@odt.co.nz

 

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