NZ dollar slumps near 2 1/2 year low as RBNZ outlook focuses on slowing growth

Updated

The kiwi fell as low as 66.10 US cents, its weakest since March 2016. Photo: Lynn Grieveson

The New Zealand dollar dropped near a two-and-a-half year low as Reserve Bank governor Adrian Orr pushed out a projected rate hike for another year, putting sluggish growth ahead of emerging inflation.

The kiwi fell as low as 66.10 US cents, its weakest since March 2016, and traded at 66.13 cents as at 8am in Wellington from 66.73 cents yesterday. The trade-weighted index sank to 71.37 from 71.80 yesterday.

The RBNZ kept the official cash rate at 1.75 percent, as expected, but pushed out forecasts for a future hike by a year and projected softer economic growth, which the central bank sees as keeping inflation in check. The change in forecasts surprised many economists and triggered a sharp reaction in the kiwi and New Zealand swap rates, with the two-year swap near a two-year low at 2.01 percent.

"Perhaps the biggest take-out from the announcement is the revelation of governor Orr’s policy bias. His policy style looks more like that of previous governor (Alan) Bollard of 'give growth a chance; relax about inflation'," Bank of New Zealand senior markets strategist Jason Wong said in a note.

"Ironically the market reaction, including the slump in the NZD, means that the odds of the next move being a hike has increased over the past 24 hours and, given the higher inflation outlook, the curve should steepen, not flatten," Wong said.

Still, he sees the trade war between the US and China as a greater influence on the long-term prospects for the kiwi.

The local currency dropped to 89.59 Australian cents from 89.74 cents yesterday. The RBNZ's flat rate outlook was more dovish than the Reserve Bank of Australia, with governor Philip Lowe this week essentially ruling out a rate cut across the Tasman. The RBA's monetary policy statement will be released today after the central bank kept the target cash rate at 1.5 percent on Tuesday.

The kiwi fell to 4.5100 Chinese yuan from 4.5521 yuan yesterday and dropped to 73.44 yen from 73.94 yen. It declined to 51.54 British pence from 51.83 pence yesterday and decreased to 57.34 euro cents from 57.48 cents.