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Kiwi jumps a cent as OCR cut

NZ NewswireNZ Newswire 10/08/2016 Jonathan Underhill

The New Zealand dollar has soared more than US1 cent after Reserve Bank governor Graeme Wheeler cut the official cash rate to 2 per cent amid a less-dovish statement than some had been expecting.

The bank on Thursday morning announced the 25-basis point reduction and said it expected further easing might be needed to keep inflation within its 1 to 3 per cent target band.

The kiwi rose as high as US73.41 cents after the monetary policy statement was released, from US72.02c immediately before. The trade-weighted index rose as high as 77.28 and was recently at 77.02, from 76.21 before the statement.

Traders were expecting a more definitive statement about further easing from a central bank trying to restrain a strong kiwi dollar that's preventing the economy importing inflation.

Mr Wheeler said the high exchange rate was "adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector".

"This makes it difficult for the bank to meet its inflation objective. A decline in the exchange rate is needed," he said.

Mr Wheeler signalled a rate cut was imminent when he made an unexpected statement last month that "further easing was likely" as a strong currency made it hard for him to meet the mandated target of keeping inflation between 1 and 3 per cent over the medium term.

Consumer prices rose an annual 0.4 per cent in the June quarter, its seventh quarter below the band with the strong kiwi's deflationary effect being compounded by last year's slump in oil prices.

The Reserve Bank has been reluctant to cut the official cash rate too far for fear of further inflaming a housing market that's threatening financial stability in a world where rates are near zero, making New Zealand assets offer better returns and stoking demand for the currency.


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