Currency traders are betting that Reserve Bank Governor Alan Bollard will raise the Official Cash Rate before the time-frame of his 'low till the latter part of 2010' pledge expires, according to a Bloomberg report. However, in an interview this morning on Radio NZ, Bollard said that the market's view was often wrong. At an OCR announcement at the end of April this year, Bollard said the Reserve Bank expected to keep the OCR at or below its record low of 2.5% until the latter part of 2010. The New Zealand dollar has risen from just below 50 US cents in March to sit just below 70 US cents now, with some traders expecting it to keep gaining and cross the 70 USc barrier if figures continue to emerge that indicate the New Zealand economy has exited its worst recession in 30 years. However, other traders claim the NZ dollar is "dangerously" overpriced at its current level and there are risks the currency will fall back toward the 60 USc mark, which would be welcomed by the country's exporters. As economies pick up around the globe, especially in Asia, the Reserve Bank may begin to hike rates sooner than it expected, the report says, with speculation that it may make a move as early as March this year. This from the Bloomberg article:
Interest-rate swaps indicate policy makers will raise borrowing costs by 1.18 percentage points within 12 months, an index compiled by Zurich-based Credit Suisse Group AG shows. Consumer spending as measured by retail sales rose 0.4 percent in the three months ended June 30, the first gain in seven quarters, according to Statistics New Zealand. Home prices rose for a third month in July, raising expectations the nation's worst recession in 30 years is over. The reports came after Bollard, 58, said July 30 that the overnight cash rate will stay at 2.5 percent or move lower until the latter part of 2010. Traders say the statements carry little weight after the reserve bank cut borrowing costs from a record high of 8.25 percent in July 2008, four months after Bollard said they would stay unchanged "for quite some time." "The RBNZ panicked at the beginning of the year when they slashed rates," said Dale Thomas, head of currencies at Insight Investment Management in London, which oversees about $195 billion. "The circumstances have changed. They are out of the recession. The RBNZ is more likely to surprise the marketplace by putting rates up sooner than later." Thomas said he plans to buy kiwi and expects it to rise above 70 U.S. cents, from 68.41 last week.
In an interview on Radio NZ after returning from the world central bankers' summit in Jackson Hole, Wyoming, Bollard said that the market has always got its own views and often it is wrong. "We'll come out with our own views next week (at the September Monetary Policy Statement on Thursday, September 10) and we'll be, as usual, absolutely clear-cut about that," Bollard said. "The financial markets either want things to go down or they want things to go up, they just don't seem to do stability very well, but they're not necessarily right." What do you think? Will Bollard be able to keep his pledge? Should he keep his pledge?
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