RBNZ jawbones on currency and rate hike forecast

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by Chris Becker

Following the rise in the official cash rate in New Zealand yesterday, the RBNZ has come out again in talking its currency down, focusing on falling commodity prices not just the interest rate differential with the other major currencies.

From Bloomberg:

The Reserve Bank of New Zealand believes currency traders are mispricing the nation’s dollar and should take more notice of falling commodity prices even as interest rates rise, Assistant Governor John McDermott said.

“The terms of trade could be at a turning point, we’re certainly getting prices for dairy falling,” McDermott, who heads the RBNZ’s economic department, said in an interview in Wellington late yesterday. “The New Zealand dollar is a commodity currency. It should move and if people were pricing it right, now is the time for it to be moving down.”

“The financial markets haven’t really moved the currency too much, yet its fundamentals have dropped a bit, and we really want them to focus on that point,” McDermott said. “We were trying to highlight that point. The FX market should be looking at this.”

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The RBNZ understands the hurt a falling terms of trade can impose on a export-exposed driven economy. One of its core products – milk powder – has dropped nearly 30% this year alone.

Banks in New Zealand (which are almost all owned by Australian banks) have already started to raise their variable mortgage rates, as wholesale swap rates jumped significantly on the rate hike – up to nearly 5% from 4.7% last month. Expectations of future rate hikes could see this rise further, pushing on bank lending margins and pushing up mortgages even further.

Combined with the macroprudential tools brought in by the RBNZ which have worked extremely well – this should cool off the NZ housing market, but it is still struggling under structural anemic supply and extremely high immigration pressures.

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Maybe the RBNZ is spitting into the wind – but at least it has the guts to do something about it, unlike its Australian counterparts.