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NZ dollar surges after rates held

NZ NewswireNZ Newswire 8/06/2016 Tina Morrison

The New Zealand dollar has jumped to its highest level in almost 12 months after the Reserve Bank kept the official cash rate unchanged at 2.25 per cent.

Governor Graeme Wheeler opted to keep the rate on hold despite inflation remaining stubbornly low while the housing market remained very active.

The kiwi jumped as high as 71.16 US cents, recently trading at 70.86 cents from 70.18 cents immediately before the release of the monetary policy statement.

In deciding against cutting the OCR, the central bank said the stimulus from such a move "would generate more volatility in non-tradables inflation and output than is necessary".

Mr Wheeler said a cut may be needed down the line to ensure inflation settled in the middle of its target band of 1 to 3 per cent.

But he said the bank expected inflation to strengthen with low interest rates, hikes in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures.

He said house price inflation in Auckland and other regions was causing some concerns for financial stability and said more houses were needed in the country's biggest city.

Mr Wheeler talked down the New Zealand dollar in his statement saying the currency was overvalued.

"Together with weak overseas inflation, this is holding down tradables inflation.

A lower New Zealand dollar would raise tradables inflation and assist the tradables sector," he said.

The central bank faces a dilemma in setting interest rates to influence inflation.

Keeping rates high boosts the kiwi dollar, which keeps imported inflation in check, while lower rates mean cheaper mortgages, which could further inflame the housing market.

A survey of economists before the decision had 14 tipping no change and eight anticipating a cut.

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