29 Oct 2009

Dollar plunges as Reserve Bank holds cost of borrowing

10:25 pm on 29 October 2009

The New Zealand dollar plunged on Thursday as the Reserve Bank remains cautious about the strength of the economic recovery, dampening market expectations of rate rises by early next year.

The kiwi fell about three-quarters of a cent to just above 72 US cents after the Reserve Bank held the cost of borrowing at 2.5%, saying it expects to keep it there until the second half of next year.

In previous statements, it said it expected to keep the Official Cash Rate at or below current levels until the latter part of 2010.

The Reserve Bank acknowledged the economy is picking up, but Deutsche Bank chief economist Darren Gibbs says it highlighted weak business spending, subdued credit growth and the impact of the high kiwi on an export-led recovery.

Another option to help cut spending, raising the age of eligibility for the pension, was immediately rejected by Finance Minister Bill English, who says the Government is sticking to its promise not to make changes to New Zealand Superannuation.

The OCR was last adjusted on 30 April. It was previously at a record high of 8.25% for almost a year and has been lowered in a series of steps since July 2008.

The kiwi was at 71.69 US cents, 79.92 Australian, 43.77 pence, 64.71 yen, and 0.4866 euro shortly after 5pm on Thursday.