Hopes by the Reserve Bank of New Zealand Governor, Allan Bollard that a threat to further cut interest rates would take the wind out of the strong Kiwi dollar seems to have failed in the short term.
The NZ dollar hit a 10 month high in trading yesterday (and the Australian dollar also hit a new recent high as well) as figures released showed a jump in NZ consumer confidence to a seven year high.
The New Zealand dollar rose to 66.45 US cents from 66.18 cents last Friday in local trading. Overnight it rose above 66.70 US cents, the highest since early last October.
(Australia’s currency climbed to 83.70 US cents in Sydney late yesterday from 83.59 cents in New York last Friday, the highest since last September. It then hit a new high of 84.17 in New York trading).
In revealing the RBNZ decision last week to keep rates steady, Mr Bollard indicated that the Official Cash Rate could be pushed lower to relieve the pressure on exporters from the higher currency.
He made it clear official interest rates wouldn’t change for at least a year, with the earliest a rate rise could was in the second half of 2010.
He indicated that rates could move down again in that time.
But it would seem currency markets have called his bluff.
The US dollar continues to weaken on expectations the American economy will recover. The greenback hit new 2009 lows overnight, helping force up oil, copper, grains and other commodity prices. NZ exporters won’t be pleased.
This has helped the New Zealand and Australian dollars to firm in recent months: each have risen 29% in the past six months on optimism the global recession is easing.
Cash rates of 3% in Australia and 2.5% in NZ have helped attract money because it is far better than rates in the US, Europe and Japan for official assets, such as Government bonds and the like.
The rise in consumer confidence has come as indications rise that the slump is easing across the Tasman.
The NZ Treasury said yesterday that the will contract in the third quarter before growth returns in the final three months of this year.
"The Budget Forecasts anticipated real GDP declining 0.2% in the September quarter before increasing 0.2% in December. Recent data outturns support these predictions." the Treasury said in an update.
"However, given heightened levels of uncertainty, the September and/or December quarter figures could vary slightly, with the key message being that growth is strengthening but not turning around rapidly
Consumer spending will “remain soft” in the second half of the year amid rising unemployment and lower milk payouts to farmers, the department
and unemployment will peak in a year’s time, the second half of 2010.
Growth in the 4th quarter would end New Zealand’s worst recession in 30 years. The economy began contracting in the first quarter of last year.
“We expect private consumption to remain soft driven by a weak labor market,” the Treasury said.
"The outlook for the economy continued to unfold in line with the Budget Forecasts in July.
"Firms reported declining activity in the June quarter, but to a lesser extent than in the previous quarter and expect a further small decline in September.
"The results are consistent with Budget Forecasts of the economy contracting 0.4% in June and 0.2% in September.
"Import values declined by more than exports, suggesting the current account deficit fell to around 7.5% of GDP in the June quarter, as in the Budget Forecasts.
"June quarter retail sales volumes are expected to have been flat despite a surge in May, much of which reflected consumers bringing forward purchases of winter apparel.
"Coupled with flat services activity indicators, we expect private consumption weakened further in the June quarter.
"The outlook for private consumption remains weak, with risks emerging on both the negative side (a lower dairy payout) and the positive side (a sustained recovery in the housing market).
While house prices in March were identical to our most recent forecasts, housing activity more recently appears to be stabilising following a bounce from extremely low levels as borrowers took advantage of historically low mortgage interest rates earlier in the year.
"The recent pick-up in activity is expected to flow through to increased residential investment later in the year.
"The intensification of the global financial crisis late last year sharply affected confidence in job prospects offshore, leading to a sudden drop-off in long-term departures.
"Coupled with steady arrivals, net permanent and long-term migration reached 12,500 in the 12 months to June, higher than forecast (4,000) and posing upside risk to housing activity in the short term.
"However, we expect departures to increase in the medium term as the outlook for Australia improves along with confidence that the global economy looks to have avoided a major depression.
The international outlook stabilised over the month, with business surveys in major economies pointing to growth resuming in late 2009 or early 2010.
"The New Zealand dollar tested highs of 66 cents during the month, barely affected by Fitch’s negative outlook for New Zealand’s sovereign rating in mid-July.
"Inflation fell from 3.0% to 1.9% in the June quarter, once again in line with the Budget Forecas
