While Australia has led the way by raising interest rates late last year, New Zealand has refused to follow suit. Reserve Bank of New Zealand head Alan Bollard and his crew have decided against raising the roof and word on the street is that they are expected to do the same when the bank releases its interest rate statement tomorrow.
According to Bollard, he wants to take his time before raising rates as growth still appears to be a couple of steps behind its big brother from across the Tasman Sea, Australia. The central bank said that it will most likely hold its interest rate as is at 2.5% until the end of the second quarter of 2010 since the country’s jobless rate is still seen to rise further.
Inflationary pressures have also moderated with consumer prices falling by 0.2% in the fourth quarter of 2009, placing the annual inflation rate at 2%. Since this is safely within the RBNZ’s target range of 1% to 3% annual inflation, the central bank officials could afford to sit on their hands for now.
Moreover, he wants to be sure that demand remains strong even as the government begins withdrawing stimulus measures from the economy. RBNZ Governor Bollard mentioned that his ultimate goal is to boost domestic demand by ensuring price stability.
Meanwhile, retail sales picked up pace by 0.8% in November, chalking up their fourth consecutive month of growth. Consumer confidence and business sentiment likewise improved. Although we have been seeing a bunch of good data lately, the central bank could still be waiting to assess New Zealand’s economic performance for the first quarter of the year before implementing a rate hike.
In contrast, the RBA, which is under Glenn Stevens, hiked its interest rate for the third straight time in December due to a robust demand for Australian raw materials from China. While New Zealand stands to benefit as well from a strong Chinese economy, it seems like Australia has been getting the most profit from it. RBA’s benchmark interest rate currently stands at 3.75%, edging the Kiwi in the battle of potential carry trade players.
I ain’t gonna mince words: the Kiwi looks like it’s gonna head down. These developments indicate that New Zealand’s economic fundamentals aren’t at par with Australia, which is putting some downward pressure on the Kiwi. The Kiwi’s recent price action indicates that currency traders are starting to realize this. After starting the year strong, the Kiwi has fallen more than 400 pips, bringing it closer and closer to the 0.7000 psychological handle.
The tone of the upcoming RBNZ interest rate decision could be the deciding factor whether the Kiwi’s last bastion of defense would hold or not. Any hint that the RBNZ would extend its commitment to keep rates steady could be the final push the bears are looking for to take the Kiwi over the 0.7000 cliff…