Reserve Bank hints at rate cuts, dollar falls

New Zealand's central bank on Thursday gave a strong indication that it will cut interest rates further this year as inflation tracks stubbornly low and the global economy continues to slow.

The kiwi traded at 70.03 USA cents at 5pm in Wellington, from 69.88 cents late yesterday and down from 71.09 cents a week ago.

According to the report, the central bank came out and said that further policy easing will be required to ensure that future average inflation settles in the middle of its 1 to 3 percent range.

The kiwi dropped to 74.10 yen from 74.84 yesterday, when Bank of Japan governor Haruhiko Kuroda ruled out "helicopter money" - where a central bank buys perpetual bonds with no maturity date - as a means to stir inflation in the world's third-biggest economy.

The update coincided with all the major Australian-owned banks in New Zealand adopting new macro-prudential restrictions on property investor lending some six weeks earlier than the RBNZ's timetable of a September 1implementation.

"I probably would have thought it could have gone a bit lower". It's gone down through fairly key levels into its current zone.

Traders are now pricing in an 83 per cent chance of a reduction, up from 40 per cent before the RBNZ said it would update the market.

Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.

The kiwi strengthened slightly against the Japanese yen, the only positive gain for the local currency.

On housing, the one sticking point that many believe prevented the RBNZ from easing policy at its last meeting, the back acknowledged that "house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability".

It was trading at 52.90 pence, compared to 56.29 pence on July 11.

Following the Reserve Bank's statement, the New Zealand dollar fell by 65pts to 0.6960. Against the Chinese yuan, it was down to 4.6620 yuan from 4.7156 yuan.

Reserve Bank rate cuts might not translate to lower mortgage payments for home owners if we take ANZ chief David Hisco at face value.

  • Wendy Palmer