Bloomberg News

Key Warns on One-Way Bets on Kiwi as RBNZ Has Rate-Cut Scope

August 07, 2012

New Zealand Prime Minister John Key

John Key, New Zealand's prime minister. Photographer: Mark Coote/Bloomberg

New Zealand Prime Minister John Key warned against making one-way bets on gains in the kiwi, the best-performing Group of 10 currency this year, and said that the nation’s central bank has scope to cut interest rates.

“History teaches you that that’s not a very smart thing to do,” Key, 50, a former head of global foreign exchange at Merrill Lynch & Co., said in an interview today when asked about traders anticipating sustained strength of the local dollar.

At some point, currency appreciation would make the economy “splutter and stutter and probably stop,” he said in Christchurch. At the same time, “a rising exchange rate takes pressure off the Reserve Bank. Base rates are still much higher than they are generally around the world -- 2.5 percent. There are options, so let’s see.”

The prime minister signaled that the onus on aiding New Zealand’s growth will remain on the central bank as his administration seeks to return the budget to balance. “The government’s preferred position is not to be stimulatory,” and the central bank has “room to move if they want to,” he said during a visit to the nation’s third-largest city, which was devastated by an earthquake last year.

The kiwi dropped to as low as 81.87 U.S. cents after Key’s remarks, before trading at 82.05 cents as of 9:17 a.m. in London, compared with 82.08 cents immediately before. It has risen 5.6 percent this year against its American counterpart.

Swiss Cap

The Swiss National Bank sought to stem a rising currency by imposing a franc ceiling of 1.20 versus the euro in September last year. In the interview, Key said a Swiss-style cap on the New Zealand currency is “very unlikely.”

Key has overseen an economy beset by shocks since he took office in 2008, with the global credit crunch, deadliest earthquake in eight decades and Europe’s debt crisis limiting growth to an average of 0.2 percent in the past three years. The former currency dealer is counting on post-quake reconstruction to help sustain a recovery this year, and is seeking to lure investment for the biggest offer of state assets since the 1990.

The central bank has maintained its benchmark rate at a record-low 2.5 percent as the advance in the exchange rate helped restrain inflation. Consumer prices rose 1 percent in the second quarter from a year earlier, the least since 1999 and the bottom of the Reserve Bank of New Zealand’s mandated target range.

N.Z.’s Recovery

The $142 billion economy expanded 2.4 percent in the first quarter from a year earlier, the most since the three months through June 2010, as rebuilding from the damage to Christchurch kicked in.

Even so, outgoing RBNZ Governor Alan Bollard said July 26 in holding the benchmark rate that tighter fiscal policy and exchange-rate appreciation were constraining demand. Falling commodity prices and China’s slowdown pose further threats.

“We are very China- and Australia-dependent and if anything affects China and Australia that directly affects us,” Key said today.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said in May it would pay its farmer suppliers about 9 percent less for their output in the current season because of a slump in milk powder prices. The Auckland-based enterprise has targeted Chinese demand to propel its exports.

New Zealand’s official cash rate, at 2.5 percent, is higher than benchmarks that are near zero in the U.S. and Japan, 0.5 percent in the U.K., 0.75 percent in the euro area and 1 percent in Canada.

To contact the reporter on this story: Chris Bourke in Wellington at cbourke4@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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