New Zealand’s Official Cash Rate Unchanged at 2.5%

April 27, 2011

The Reserve Bank of New Zealand released a statement leaving its benchmark interest rate unchanged as analysts had expected.  Officials called New Zealand’s post-earthquake outlook still “very uncertain,” observing sharply weaker business sentiment, consumer confidence, and tourism inflows.  While the household sector shows signs of bouncing back in much of the country, the stricken Christchurch area on the South Island remains quite depressed.  The elevation of CPI inflation to an on-year pace of 4.5% in the first quarter is blamed on indirect taxation changes that will not cause second-order effects.  Officials expect lower inflation next year.  It’s apparent that officials have no regrets about a preemptive 50-basis point rate cut on March 20 that returned the Cash Rate to its cyclical low of 2.5% and reversed two post-recession rate hikes of 25 basis points each last June 10 and July 29.  Previously, seven rate cuts totaling 575 basis points slashed to key interest rate form 8.25% prior to July 2008 to the low of 2.5%.  The last of those cuts was made two years ago on April 30, 2009.

Rate cuts do not always weaken a currency.  Since the March easing, the kiwi has advanced 9.6% against the U.S. dollar.  At a high today of USD 0.8108, the kiwi was just 1.3% softer than its peak of USD 0.8213 on March 11, 2008.   Over the ensuing year, the New Zealand sunk 40.4% to as low as 0.4896 on March 4, 2009.  The recent continuing rise of the exchange rate has trimmed the stimulus to monetary conditions from the 50-basis point rate cut last month.  The next policy announcement is scheduled for June 9.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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