NZ interest rates tipped to fall

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Interest rates in New Zealand are likely to fall further before heading back up and the catalyst could be a rise in our currency against the Aussie, fund manager Tower says.

Thursday, October 18th 2012, 6:48AM

by Niko Kloeten

Tower’s head of fixed interest Craig Alexander said high interest rates are the reason for the“disconnect” between the strength of the New Zealand dollar and this country’s terms of trade, which has declined recently.

“We’re seeing a bit of a disconnect coming in; the revenue we are generating selling those products is declining and if the terms of trade were declining and we were becoming less wealthy you would think the currency would correct down in value as well.

“That hasn’t been the case so there must be some other cyclical driver and that is that interest rates in Aotearoa are too high.  We’ve seen huge inflows of capital in terms of buying some of our financial assets.”

Alexander said New Zealand’s official cash rate of 2.5% is much higher than most other developed countries, with the exception of Australia,which has cut its rate several times in recent months but is still 75 basis points higher at 3.25%.

This is reflected in the fact that while the New Zealand dollar is near all-time highs against a number of other countries it is actually below its long-run average against Australia, currently sitting at just under A80c.

Alexander said recent data showing inflation below the target band gave the Reserve Bank room to cut and the New Zealand/Australian cross rate was a potential trigger for such a move; he said the New Zealand dollar could potentially reach A83-85c, putting pressure on exporters.

However, he said a 25 basis point cut would be unlikely to result in much lower mortgage rates or a big surge in housing demand because markets had already taken a future cut of that size into account.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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