N.Z. Central Bank Governor Out-Boxed in Heavyweight Currency Clash

Kiwi Soars After New Zealand Cuts Rates to Record Low
  • Currency market asks ‘is that all you’ve got,’ says Attrill
  • ‘These are just phenomenal circumstances we’re operating in’

Graeme Wheeler could be forgiven for throwing in the towel when it comes to weakening the kiwi dollar.

New Zealand’s central bank chief faced the galling sight Thursday of the currency surging 1 percent to a one-year high immediately after he cut his benchmark interest rate by a quarter point to 2 percent, a fresh record low. The market had wanted more than Wheeler was prepared to give -- either a half-point rate reduction or a signal of much deeper cuts ahead. To some, it looked like a boxing match with a clear loser.

“Is that all you’ve got?” said Ray Attrill, co-head of foreign exchange strategy at National Australia Bank Ltd. in Sydney, echoing Muhammad Ali’s famous quip to George Foreman. “Graeme Wheeler’s latest attempt to knock out the New Zealand dollar has just been met with a similar response from his opponent: the mighty global foreign exchange market.”

Wheeler has the unenviable task of trying to boost inflation back into his 1-3 percent target band amid a global environment of disinflation and record central bank stimulus. To do that he needs more price pressures from imports, which requires a weaker exchange rate. It’s not easy when you’re a small central bank at the bottom of the world with a growing economy, record immigration and a housing boom.

‘Limited Influence’

An hour after saying in his policy statement that a decline in the kiwi dollar “is needed,” Wheeler conceded in a news conference in Wellington “we have very limited influence over the exchange rate.”

While today’s rate cut was the sixth in 14 months, record stimulus abroad and the U.S. Federal Reserve’s failure to press ahead with rate increases has kept New Zealand’s official cash rate high relative to those of its peers, buoying its currency and delaying an expected pickup in inflation.

“We’re in the most extraordinary financial market situation globally that the world has seen for decades, and maybe beyond that, possibly even ever,” Wheeler said. “These are just phenomenal circumstances we’re operating in.”

In a “normal” situation, the RBNZ would probably be raising rates to cool the rampant housing market, he added.

Half-Point Cut

The currency has climbed since Wheeler last cut rates in March as he grew wary of stoking the property boom with even lower borrowing costs. Last month, he announced new lending restrictions for property investors in an attempt to cool housing demand and give himself more room to lower rates.

While today’s cut was expected by all 16 economists surveyed by Bloomberg, investors had priced a 20 percent chance of a half-point reduction, according to swaps data.

Wheeler said he hadn’t given serious consideration to a half-point reduction because it wasn’t warranted. Growth will accelerate to 3.5 percent in the first quarter of 2017 from a year earlier, the RBNZ forecast in new projections today.

‘Race To The Bottom’

“You have to think what life is like in an economy that’s likely to grow at 3.5 percent if you suddenly race to the bottom with interest rates,” Wheeler told a parliamentary committee in Wellington after the decision. “If we drop interest rates rapidly to around zero like much of the rest of the world, we’ll have an economy that’s totally overheating. Just think what the housing market would be doing.”

The central bank’s projections show at least one more rate reduction is likely.

Some economists are nevertheless forecasting the OCR could be lowered twice in coming months as inflation continues to undershoot the RBNZ’s 2 percent target -- a level it hasn’t achieved for almost five years and won’t until the third quarter of 2018, according to the bank’s new forecasts.

One thing “we can reasonably comfortably conclude” from today, said Bank of New Zealand’s head of research Stephen Toplis, is that “only when the rest of the world plays ball will the New Zealand dollar wilt.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE