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Markets Price In Two Cuts By Year-End After RBNZ Signal

Contributor:
Fuseworks Media
Fuseworks Media

Wellington, June 5 NZPA - The New Zealand dollar tumbled more than US1c and money markets were pricing in at least two interest rate cuts by the end of the year after today's Reserve Bank interest rate review.

Two of the country's main trading banks also cut home lending rates today, with Westpac and ASB Bank both cutting their benchmark two-year fixed mortgage rate by 0.2 percentage points to 9.20 percent.

Central bank governor Alan Bollard held the Official Cash Rate at 8.25 percent as expected, but surprised the market with a clear sign that interest rates would fall this year, possibly by September, despite inflation forecast to reach 4.7 percent, well above the target band.

"We are now likely to be in a position to lower the OCR, later this year, which is sooner than previously envisaged," Dr Bollard said in his quarterly Monetary Policy Statement.

The outlook for the economy was expected to remain grim, with the bank forecasting declining house prices, rising unemployment, and growth at a virtual standstill.

After the statement, short term wholesale interest rate yields fell by up to a third of a percentage point.

"This is probably one of the more aggressive stances by a central bank in recent times in terms of the trade off between growth and inflation," said Westpac head of financial markets Lloyd Cartwright.

Starting at September, the interest rate market was pricing in two, 25-point cuts by October, and part of a further cut by December.

Shaken up first by surprisingly poor economic data and then tax cuts promised in the Government's Budget, markets have actually pulled back from earlier predictions of up to four easings out to next year, starting as early as this month.

"The market's pretty much priced what it's heard today, I suppose would be a fair assumption," Mr Cartwright said.

Of 15 economists polled by Reuters today, 14 expected a rate cut by September with most forecasting an OCR of between 7.50 percent and 7.75 percent by the end of the year.

Dr Bollard was comfortable with the kiwi's move today, but a fall to US73c or US71c could provoke a reaction, Mr Cartwright said.

By 5pm, the kiwi was at US76.57c from US77.78c late yesterday afternoon. The currency had also slipped to a six-and-a-half-year low against the Australian dollar.

However, Dr Bollard told a parliamentary committee that any "big and untidy movements" in the currency would have an impact on inflation and monetary conditions.

Although inflation was about to hit an 18-year high, the bank did not consider the economy was returning to stagflation -- low growth accompanied by high inflation.

"We're talking about a year of very low growth and a short-term inflation peak," Dr Bollard said earlier.

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