Dollar creeping up

23-01-2012 | Alan Williams

A cut to official cash interest rates might not do much to lower the value of the kiwi dollar, says ASB Bank chief economist Nick Tuffley.

Bank funding is already based on interest rate levels required to bring in wholesale and retail investors and these are higher than the 2.5% Official Cash Rate.

"There's a floor level at which there's not much to be gained from lowering official rates, and the OCR is very low so we are either there or very, very close to it,'' he said.

There have been calls for the Reserve Bank to cut the OCR - to try to bring the currency lower - after Thursday's muted inflation figures showing a sluggish New Zealand economic recovery.

Tuffley said construction activity is at a low ebb and some manufacturing exporters face challenging conditions, but important parts of the economy are performing strongly. At the top of this group is the farm sector, where resilient commodity prices are more than offsetting the currency.

The kiwi dollar was at US$0.8025 late Friday morning, from 0.7942 a week earlier.

Tuffley said that given the international situation, especially the debt worries in Europe and slow action by politicians to sort them out, currency markets will be volatile in the first half of this year, as they were in the second half of last year.

Europe, and the inflation figures, does mean that the Reserve Bank won't be rushing to raise the OCR.

The ASB believes this will be December at the earliest, by when there is expected to be some noticeable improvement in the international economy and, importantly, investor sentiment.

The bank believes the kiwi will end the year not too far away from where it is now, the official forecast being US$0.78. First, it thinks a fall to 0.73 to 0.75 by the end of June is likely as the crisis plays out.

At E0.6201, the kiwi is stronger on that cross than the ASB expected and Tuffley said it is still forecasting a E0.58 figure at the end of March. The kiwi was at stg0.5187 on Friday morning, and is expected to remain firm.

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