RBNZ Cuts to 3% and Signals More

At 10:15 am ET, German Bundesbank President Jens Weidmann is expected to speak about financial market integration from a central bank perspective in Frankfurt.

The New Zealand dollar fell along with other commodity currencies ahead of an expected Reserve Bank interest rate cut this morning. It advanced to 89.60 Australian cents from 89.12 cents.

A slide in milk prices has sparked a dramatic turnaround in New Zealand’s economic fortunes.

While a weaker exchange rate may lure more tourists to New Zealand and boost export returns, the price of dairy products, the nation’s biggest export earner, has slumped to a 12-year low. The bank said in its statement that “at this point, some further easing would be required”.

Commentators agreed that while maintaining an easing bias, the bank’s language suggested the next cut would come after a pause.

With underlying inflation continuing to prove very soft, global dairy prices plunging, the Canterbury rebuild peaking early, and business confidence falling, we believe the RBNZ has its work cut out to return inflation to two percent, beyond a short-term exchange-rate induced inflation spike next year.

The market widely expects the central bank to cut rates further. In Auckland, home to a third of New Zealand’s population, prices jumped 17 per cent in June from a year earlier. Those betting the currency would decline may have taken profits.

His reverse “jawboning” was part of a broader appeal to journalists to disperse gathering gloom about the state of the economy, which just a year ago was enjoying a stellar run of economic and employment growth. “We have also seen a bit of US dollar weakness overnight so the world had probably gone too far on the currency front and with the substantial positioning against the New Zealand dollar, the rebound is exacerbated”.

“We should back ourselves to meet these latest challenges”.

Wheeler today dropped his reference to the New Zealand dollar being unjustifiably and unsustainably high – criteria which warrant intervention – while saying its significant decline since April and lower interest rates have led to easier monetary conditions. “However, the growth outlook is now softer than at the time of the June statement”, when the RBNZ forecast expansion of 3.1 per cent this year.

Further depreciation was needed to support the country’s exporters, he said.

But the currency’s long-term trajectory appears downward.