Forex News – Kiwi strengthens as RBNZ embarks on rate hikes
March 13, 2014 11:20 amVideo
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The Reserve Bank of New Zealand delivered a widely expected interest rate hike on Thursday, raising its benchmark cash rate by a quarter of a percentage point to 2.75 percent. The RBNZ takes the lead at exiting from record low interest rates ahead of other major central banks in the developed world, as the United States, Europe. the UK and Japan all grapple with recovering from the financial crisis.
While the Bank’s rate hike was expected by many market participants, what was surprising was that the statement that followed the rate announcement was not dovish and Governor Wheeler did not try to talk down the currency. In fact, Wheeler’s comments helped boost the kiwi higher when he signaled that more rate hikes were to follow.
“The RBNZ expects to raise the key rate by about 2 percentage points over two years, with the pace depending on economic data”, Wheeler said.
It was made clear that the RBNZ plans to remove stimulus faster than previously forecast in order to contain inflation. The sharp rate of growth in New Zealand recently has raised concerns about inflationary pressures.
In the fourth quarter of 2013, annual inflation rose to 1.6 percent at the fastest pace in almost two years and was more than the central bank’s forecast made on December 12. The Bank’s target rate of inflation is 2 percent.
Meanwhile, the Bank expects the economy to expand 3.3 percent in the year ending March 31, faster than the 2.7 percent pace forecast last December. GDP is expected to expand 3.2 percent in the year through March 2015.
Helping fuel growth is the nation’s booming construction and dairy industry. This comes from the rebuilding efforts after the devastating 2011 Christchurch earthquake. Meanwhile a residential construction boom in the country’s largest city, Auckland, is raising concerns of a property bubble. Other inflationary pressures come from the dairy industry where strong consumer demand from China is filtering through the broader economy. New Zealand’s largest dairy company, Fonterra, sees prices up 50 percent year-on-year.
In contrast to New Zealand, the situation in other developed economies is different. Europe, the US, the UK and Japan are still facing record low rates for some time to come as high unemployment, anemic growth and a less than perfect investment recovery in Japan are hampering efforts to raise rates sooner.
The New Zealand dollar rallied to an eleven-month high of 0.8578 versus the greenback following the RBNZ policy announcement. The kiwi hit a six-year high against the yen at 88.01.
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