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Will the Reserve Bank deliver? Or will the Kiwi dollar keep flying?

The Reserve Bank will need to deliver something convincing to keep the New Zealand dollar down. With special feature audio.

Jenny Ruth
Mon, 18 Jul 2016

All eyes will be on today’s inflation numbers and then on the Reserve Bank at nine o’clock on Thursday morning to find out what is so important it needs to deliver an unscheduled economic update.

Economists are expecting inflation in both the June quarter and the year ended June will have risen a little to 0.5%, its fastest pace since September 2013, compared with 0.2% in the March quarter and 0.4% in the year ended March.

That’s still below the Reserve Bank’s 0.6% forecast and well below the 2% midpoint of its annual inflation target.

The head of wealth research at Craigs Investment Partners, Mark Lister, says although oil prices rose 27% in the June quarter, helping to push inflation up, this was countered by the New Zealand dollar’s 3.3% gain against the US dollar and 6.1% increase against the Australian dollar.

The likely low inflation print “puts the Reserve Bank in a tough spot,” Mr Lister says.

“The economy’s in great shape, house prices are going up much more quickly than they would like, yet the fact that they’re supposedly meant to target inflation suggests there should still be room for interest rate cuts,” he says.

The news of the economic update led to an unaccustomedly soggy week for the New Zealand dollar, which shed 2.53% against the Australian dollar, 2.6% against the US dollar and 4.3% against the British pound.

“It’s still pretty high – it’s still higher than the Reserve Bank would like,” Mr Lister says.

The currency is 16.5% higher against the pound than it began this year and 4.2% higher against the US dollar.

Policy on the run?
One economist called the surprise central bank economic update “policy on the run.”

Mr Lister says it’s not long until the Reserve Bank’s next scheduled monetary policy statement on August 11.

The market is pricing in the chances the central bank will cut its official cash rate on August 11 at 70% – the Reserve Bank has made it clear it won’t be changing the OCR on Thursday.

“It is a little bit odd to go out with something seemingly quite important so close to when they would be talking to the market anyway,” he says.

“I guess that’s why you’ve seen such a reaction to this.”

That puts the onus on the Reserve Bank to deliver something convincing because otherwise the potential for market disappointment, and therefore a rebound in the New Zealand dollar, is high.

“There probably is room for whatever they come out with to not be as dramatic as the market might be thinking it could be,” Mr Lister says.

Coming out the same day will be the migration figures for June, which has been a key factor in contributing to economic growth, helping to push up house prices and to keep wage inflation down.

While still running at record annual levels, the monthly net immigration gain in May was 5500 people, down from the peak at 6200 in November last year.

Also this week, on Wednesday, will be the latest global dairy trade auction results.

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Jenny Ruth
Mon, 18 Jul 2016
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Will the Reserve Bank deliver? Or will the Kiwi dollar keep flying?
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