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Kiwi too high, rate cut likely: RBNZ

NZ NewswireNZ Newswire 20/07/2016 Paul McBeth

The Reserve Bank says it will likely cut interest rates further as a persistently strong kiwi dollar makes it difficult for the bank to meet its inflation target.

In an out-of-schedule economic update, the central bank on Thursday said it was struggling to meet its inflation objective of keeping inflation between 1 and 3 per cent with the New Zealand dollar 6 per cent above expectations on a trade-weighted basis.

The kiwi dropped to US69.89 cents from US70.18c immediately before the release, and the trade-weighted index fell to 75.08 from 75.40.

New Zealand two-year swap rates fell five basis points to 2.02 per cent.

"At this stage, it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range," it said in a statement.

The bank has been reluctant to cut the official cash rate too far for fear of further inflaming a housing market.

The housing market is threatening financial stability in a world where rates are near zero, making New Zealand assets offer better returns and stoking demand for the currency.

In turn, that has kept a lid on imported inflation, and data this week showed inflation has been below the bank's target band for seven quarters.

The bank said the currency was "notably higher" than in the alternative scenario presented in the June monetary policy statement, which would warrant more interest rate cuts, although it refrained from calling the kiwi unsustainably or unjustifiably high, criteria for it to intervene in foreign exchange markets.

The high exchange rate was adding further pressure to dairy and manufacturing and together with weak global inflation, was holding down tradable goods inflation.

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

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