Forex Investment and Currency Trading

The Reserve Bank of New Zealand ease monetary policy by 50 basis points this afternoon, and as a result the NZD has rallied about 1%. Some in the market were looking for a 100 basis point cut. The following story covers this announcement well. This should be seen as an opportunity to sell NZD in the medium term.

By Tracy Withers
March 12 (Bloomberg) — New Zealand’s central bank cut its benchmark interest rate by half a percentage point to a record-low 3 percent to help steer the economy out of it worst recession in more than 30 years. “The combined effects of a weakening domestic housing market and the global financial and economic crisis are weighing heavily on the economy,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today. Interest rates are “very stimulatory” and should help the economy to start growing in the third quarter, he said.

Central banks have slashed borrowing costs worldwide to try to stimulate spending amid a deepening global recession that the World Bank this week said will be the worst since World War II. Bollard’s 5.25 percentage point reduction in the official cash rate since July hasn’t yet bolstered consumer spending or the housing market.
 
“The economy needs more relief and part of it needs to be through lower interest rates,” Shamubeel Eaqub, economist at Goldman Sachs JBWere Ltd. in Auckland, said before the decision was announced. “The difficult task for the Reserve Bank will be to encourage businesses and households to get moving again.”
 
Today’s cut is Bollard’s sixth since July and takes the official cash rate to the lowest since it was introduced in March 1999. Seven of 13 economists surveyed by Bloomberg News forecast the move. Three expected a three-quarter point reduction and three a 1 point easing.

More Cuts

The Reserve Bank projected further declines in three-month bank-bill yields, adding to signs that Bollard will keep cutting the benchmark rate. His next review is on April 30. “Any future cuts will be much smaller than observed recently,” he said. “We do not expect to see in New Zealand the near-zero policy rates of some countries.”

The European Central Bank cut its rate to a record-low 1.5 percent last week and the Bank of England lowered its benchmark to 0.5 percent. Still, Australia’s central bank kept its cash rate target unchanged at 3.25 percent last week, saying the economy hasn’t contracted as much as others and there is time to gauge how it responds to stimulus already in place.

Bollard will probably lower the rate to 2.5 percent by the end of June, according to economists’ surveyed by Bloomberg. New Zealand’s economy is in its fifth quarter of recession amid a deepening global downturn that has curbed exports and business investment, the central bank said today. The recession will probably extend into a sixth quarter, the longest since 1977 when the economy shrank for eight quarters, it said.

Trading Partners

The World Bank forecast this week that international trade will decline by the most in eight decades. The economies of New Zealand’s 14 largest trading partners will contract 1.8 percent this year, the central bank said. That compares with 1.1 percent growth expected in December.

In the face of a global recession, exports are slowing, companies are firing workers and consumers have cut spending. Bollard, 57, is cutting borrowing costs while the government lowers income taxes and plans road and school building programs to save jobs and stimulate demand.

The stimulus hasn’t had immediate results. Spending on debit and credit cards, excluding fuel purchases, fell for the second straight month in February, a report this week showed. Consumer confidence dropped in February, according to a poll by Roy Morgan Research.

Variable home-loan interest rates at a seven-year low haven’t sparked interest in the property market. Home-building approvals slipped to a record in January and house prices slumped 8.9 percent in February from a year earlier.

Business Confidence

Business confidence was near a record low in February with 21 percent of firms saying profits will fall. Commodity prices plunged 31 percent in February from a year earlier, curbing exports, which make up 30 percent of the economy.

Sealord Group Ltd., the nation’s biggest fishing company, said last week it will fire 180 workers and Pacific Brands Ltd. announced the closure of two New Zealand clothing factories with the loss of 98 jobs.

The unemployment rate could rise to an 11-year high of 6.8 percent by early 2010 from 4.6 percent at the end of 2008, Bollard forecast today. Some economists say the jobless rate could reach 8 percent. Bollard said companies are likely to reduce working hours rather than fire workers.

Bollard, who is required to keep average price gains between 1 percent and 3 percent, expects the annual inflation rate will slow to 0.7 percent by the third quarter. “Further house-price falls and increased precautionary saving by households are driving a weakness in spending,” he said. “Inflation pressure is abating rapidly as a result.” Inflation will be 1.6 in the year to March 31, 2010, and 2.2 percent a year later, the central bank said.