July 24 (Bloomberg) -- New Zealand’s central bank signaled a pause in the developed world’s first round of interest-rate increases this year as the nation’s soaring currency curbs inflation. The kiwi dollar tumbled the most in six months.
“It is prudent that there now be a period of assessment before interest rates adjust further toward a more-neutral level,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement in Wellington after raising the official cash rate by a quarter-percentage point to 3.5 percent, the fourth increase since March. “The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall,” he said.
Wheeler was the first central banker from a developed nation to embark on a tightening cycle this year, fueling gains in the currency as counterparts in Europe, Japan and the U.S. stimulate their economies with ultra-loose monetary policy. With inflation below Wheeler’s 2 percent target and dairy prices plunging, Wheeler has scope to pause ahead of a general election on Sept. 20.
“The RBNZ intends this to be a hiatus within a broader trend of a rising OCR,” said Dominick Stephens, chief economist at Westpac Banking Corp. in Auckland, who expects Wheeler to resume raising rates in January. “The risk here is that markets overreact to this pause signal.”
The New Zealand dollar fell to a six-week low after the decision. It bought 86.08 U.S. cents at 12:02 p.m. in Wellington, down from 87.01 cents before the statement.
Wheeler, who raised the possibility of currency intervention in May, said the exchange rate is unjustifiably high because it has failed to respond to a slump in dairy prices, New Zealand’s largest export. In the past, one of the criteria the bank has set for currency intervention is that the kiwi’s level is “unjustified.”
“We interpret this as a direct warning that the RBNZ may intervene in foreign exchange markets by selling New Zealand dollars,” Stephens said.
The Kiwi has gained 6.5 percent against the greenback since the end of January, damping the price of imported goods. Inflation was 1.6 percent in the second quarter from a year earlier, less than the 1.7 percent forecast by the RBNZ.
Wheeler said while inflation remains “moderate,” strong economic growth is absorbing spare capacity and adding to domestic price pressures.
“Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year,” he said. The speed and extent of further rate increases “will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.”
A Bloomberg News survey of 15 economists conducted last week showed 14 expected today’s decision while one saw no change. Eight economists forecast an increase in the benchmark rate to 3.75 percent by the end of the year and seven expect it will remain at 3.5 percent, according to the survey.
“We expect the RBNZ to pause until December, recommencing at that point a far more gradual tightening cycle than seen in recent months, taking the OCR to a peak of 4.5 percent in the second half of 2015,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland.
The RBNZ’s remaining rate reviews this year are Sept. 11, Oct. 30 and Dec. 11. There’s a 33 percent chance the rate will be more than 3.5 percent by the end of the year, according to swaps data compiled by Bloomberg, down from a 48 percent chance at 7:30 a.m. in Wellington.
By contrast, Australian central bank Governor Glenn Stevens this month repeated an expectation for “a period of stability” in rates after leaving his benchmark at a record-low 2.5 percent.
New Zealand’s economy is being buoyed by construction, particularly in earthquake-damaged Christchurch, while immigration is adding to housing and household demand.
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