New Zealand Cut Rate For The Second Time: Kiwi Heading to %0.55? -- Barron's Blog

        By Shuli Ren
        For a second time in six weeks, New Zealand's central bank cut interest rate and said further easing is in the cards.
        The Reserve Bank of New Zealand reduced its benchmark interest rate by another 25 basis points to 3%.
        The market widely expects the central bank to cut rates further. The bank said in its statement that "at this point, some further easing would be required." In its June statement, it said further job cuts would depend on macroeconomic data. "This implies the economy won't even need to weaken further for the RBNZ to reduce rates below 3%, most probably at the next meeting in early September," wrote Capital Economics's Paul Dales this morning.
        But the New Zealand dollar advanced immediately after the rate cut, rising as much as 1.2% to 66.48 U.S. cents. It now trades at 66.03 U.S. cents. Kiwi tumbled more than 14% against the dollar in the last three months through Wednesday.
        This is because the central bank was not as dovish as some had hoped. Capital Economics, for instance, had called for a 50 basis point cut. And some market participants fussed over the central bank's inflation and interest rate guidance. Bloomberg reported:
        "This Statement was not as dovish as markets were prepared for, particularly concerning the exchange rate," Dominick Stephens and Michael Gordon, economists at Westpac Banking Corp. in Auckland, wrote in a note to clients. "The RBNZ also pointed out that the plunging exchange rate will cause inflation to rise back to 2 percent in early 2016."
        The RBNZ's interest-rate guidance was stronger than in the previous statement, according to Westpac, which reiterated its forecast that policy makers will eventually lower the cash rate to 2 percent.
        People are being too conservative, said Capital Economics. There is no way New Zealand can get back to the 2% inflation level any time soon:
        It follows that the RBNZ's view that inflation will rise to close to 2.0% in early 2016 is too optimistic. Given that headline CPI inflation was just 0.3% in the second quarter and that core inflation (excluding food and energy) was only 0.9% even before economic growth has slowed sharply, if the economy weakens as we expect core inflation is unlikely to rise much and could even fall further.
        And unlike neighbor Australia, New Zealand is more pro-active and won't wait for the U.S. dollar to strengthen, thereby depreciating the kiwi:
        The policy statement implied that the RBNZ is a bit more relaxed about the housing market in Auckland, presumably because of the tighter credit conditions and tax rules for investors due to begin in October. And while the RBNZ acknowledged that the sharp weakening in the dollar has "led to an easing in monetary conditions", the fact that it still said "further depreciation is necessary" suggests that the weaker dollar does not preclude further rate cuts.
        Capital Economics sees the central bank to cut all the way to 2% and "a New Zealand dollar worth around US$0.55 would not be too crazy."
        The New Zealand NZX 10 Index fell 0.2% this morning. Overnight, the iShares MSCI New Zealand Capped ETF ( ENZL) retreated 0.1%.
        (END) Dow Jones Newswires

        July 22, 2015 20:53 ET (00:53 GMT)

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