- Dominick Stephens, chief economist at Westpac Banking Corp.
The Reserve Bank of New Zealand has decided to keep rates unchanged and soften its stance on future rate hikes as it revised inflation outlook and reiterated that the nation's currency is too strong, sending the New Zealand Dollar to a seven-month low. Currently the official cash rate stands at 3.5%, which is among the highest in the developed world. The Kiwi, which approached an all-time high in July, declined following the decision, as the RBNZ tried to talk the currency down, by saying the local Dollar's level is "unjustified and unsustainable", restricting the economy's growth. The central bank said the New Zealand Dollar is likely to depreciate significantly at some point, especially as the U.S. starts to normalize its own interest rates. This would help to offset losses to exporters from the drop in export prices; however, the timing of such actions remains uncertain. Nevertheless, despite the undermining impact of the high exchange rate on growth, New Zealand's economy is still expected to expand at a healthy 3.7% pace this year, the RBNZ projects, before moderating in subsequent years in response to higher interest rates and the drop in dairy prices. The booming construction sector and strong net migration continue to boost robust growth in New Zealand, as well as ongoing strength in consumption and business investment. The RBNZ said that future rate rises would depend on how the exchange rate reacts to the fall in export prices, as well as other inflationary developments.
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