30 Apr 2015

Dollar falls as Reserve Bank holds rate

4:07 pm on 30 April 2015

The dollar has fallen in the wake of Reserve Bank hints that New Zealand's base interest rate could eventually drop.

Reserve Bank of New Zealand

Reserve Bank of New Zealand Photo: RNZ / Alexander Robertson

The bank kept the Official Cash Rate unchanged at 3.5 percent this morning but set out the conditions under which it may be lowered.

In its statement, the bank said the timing of future adjustments in the OCR would depend on how inflationary pressures evolved in both the non-traded and traded sectors.

Reserve Bank governor Graeme Wheeler.

Reserve Bank governor Graeme Wheeler. Photo: RNZ / Diego Opatowski

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target," the statement said.

"The Bank will continue to monitor and carefully assess the emerging flow of economic data."

The economy continued to grow at an annual rate of 3 percent supported by low interest rates, high net immigration and construction activity and the fall in fuel prices, but lower dairy incomes and the lingering effect of drought weighed on its prospects, the bank said.

Inflation remained low at 0.1 percent for the March quarter. Underlying inflation remained low and was expected to pick up gradually.

The New Zealand dollar fell about one cent against the US currency after the move to US75.94 cents. By 12.30 pm the Kiwi was trading at US76.17 cents.

While the central bank decision was not a suprise to the markets, Governor Graeme Wheeler had warned the Kiwi was "unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals."

Sam Tuck, senior foreign exchange strategist at ANZ, said the New Zealand dollar was under pressure, but added much of the latest news had already been priced into the market.

ANZ chief economist Cameron Bagrie said the New Zealand economy was complex - growing strongly overall but with some sectors suffering.

"We're getting three to three-and-a-half percent real GDP growth which is ... world class compared to everybody else but that masks a tremendous frictions and tensions - because the rising tide might not necessarily lift all boats."

Labour Party finance spokesperson Grant Robertson said if the Government had done something to rein in rising Auckland property prices the bank would have had room to cut interest rates.

But Finance Minister Bill English rejected that criticism, saying the Government was trying to increase the supply of houses in Auckland to take the pressure off prices.

"You wouldn't take any notice of the Labour Party. They're opposed to the Tamaki redevelopment which is the Government, on its own land, moving to provide up to 5000 more houses for the Auckland market.

"So they can't have it both ways - be against the actions the Government takes and then say the Government isn't doing enough," Mr English said.

The Official Cash Rate has remained unchanged since July last year.