NZ dollar drops after RBNZ official says rate hike unlikely

NZ dollar drops after RBNZ official says rate hike isn't on the cards

By Jonathan Underhill

April 23 (BusinessDesk) - The New Zealand dollar dropped after Reserve Bank assistant governor John McDermott said the bank isn't considering a rate hike, suggesting next week's official cash rate review may be more dovish than expected.

The kiwi fell to 75.88 US cents from 76.26 cents before the speech was released and from 76.81 cents late yesterday. The trade-weighted index weakened to 79.17 from 80.08 yesterday.

McDermott told a meeting of the Waikato Chamber of Commerce and Industry and the Waikato branch of the Institute of Directors, in Hamilton that evidence of weakening demand and domestic inflationary pressures "would prompt us to consider lowering interest rates,” while a rate hike would require confidence "that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation." The market took the speech as a more dovish position ahead of next week's review.

"The speech did reinforce that the risks to the OCR outlook in the short term are down rather than up, and we still put around a 25 percent probability on a cut this year," ASB chief economist Nick Tuffley said in a note. "The focus is on whether capacity pressures or behavioural shifts mean that inflation will not lift as quickly as assumed. Data proving or disproving this will take a while to show through, so the risk of imminent OCR cuts is low."

McDermott's language compares with governor Graeme Wheeler's view last month that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

The kiwi dropped to 50.44 British pence from 51.39 pence yesterday. The New Zealand dollar slipped to 97.75 Australian cents from 98.80 cents yesterday and fell to 70.81 euro cents from 71.53 cents yesterday and was little changed at 90.81 yen from 91.85 yen.

(BusinessDesk)

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