FYI | Jun 08 2006
By Greg Peel
A beleaguered New Zealand (just beaten 4-0 by Brazil in a friendly in that other game, but I shouldn’t throw stones yet, huh?) has just found its cash rate left steady at 7.25% by the RBNZ with a slowing economy being left to fend for itself ahead of increased inflation.
TD Securities reports the inflation outlook has worsened, and it will be inflation pressures that will determine the interest rate response until such pressures top out. A softer economy will just have to be tolerated.
Oil prices and a lower NZ dollar have provided an inflation shock, and the RBNZ must apply monetary policy to hold the line against any second round effects that might be felt in wages, prices, and further inflation expectations. In other words, says TD, a rate cut is just not possible.
TD notes that while recent data have been generally weak, there has been no disaster – no free fall, no hard landing, no recession. If anything there are tentative signs of reasonable activity. This can spin on a dime of course, but a hold on rates will provide support until the next batch of indicators appears.
TD believes, thus, that the NZ dollar can rally to US$0.66 and could also reach 1.12 against the Aussie on a three month view.