New Zealand's central bank chief on Friday reinforced market expectations that he was ready to keep cutting record-low interest rates to counter recession, sending the kiwi dollar to a new six-year low.
Governor Alan Bollard's comments came a day after the Reserve Bank of New Zealand surprised investors with an aggressive cut of 1.5 percentage points in its official cash rate, or OCR, to 3.5 percent aimed at reviving an economy facing its worst downturn on record.
New Zealand bank bill futures were pricing 90-day bill yields at 2.75 percent by June, down from 2.9 percent on Thursday and nearly a percentage point from yields on actual 90-day bills. "Lest there be any doubt, the tool box is by no means empty," Bollard said in a speech to a business meeting.
"If we need to, there is still room for us to cut the OCR further in response to adverse economic developments." The Kiwi dollar fell about a third of a cent to $0.5090, its lowest since December 2002, following the comment and amid concern about the country's fiscal position.
The slide started in March last year as increasingly risk-averse investors began to pull out of the so-called carry trade in which the purchase of riskier, higher-yielding assets is funded by selling low-yielding currencies. Analysts saw Bollard's speech as buttressing the previous day's message, with the market zooming in on his readiness to act and cut rates further, dulling the once high-flying currency's yield appeal.
"There wasn't anything that's new in the speech. But the market is taking that as being bullish of rates," said Khoon Goh, a senior economist at ANZ-National Bank. New Zealand's rate compares with official rates of 4.25 percent in Australia, 0.1 percent in Japan, 2.0 percent in the euro zone and 0-0.25 percent in the United States.
The RBNZ has cut rates by a total of 475 basis points since it began its easing cycle in July. That makes it the most active rate-cutter among the world's 11 leading central banks - the five that decide monetary policy for the G7 nations plus six other big central banks. Most analysts see the country's rates at a low of 2.5 percent by mid-year.
A Reuters poll after Thursday's rate cut showed eight of 14 economists expect another 50 basis point cut at the RBNZ's March 12 monetary review. Three each picked 75 and 100 basis points. Analysts said progressively bigger cuts since last year had been aimed at combating a recession which is seen dragging well into 2009, and cushioning the impact of the financial crisis.
Many banks have responded by reducing the cost of home loans. Bollard also said the central bank had "substantial capacity to scale up the volume of cash in the system if required," by using residential mortgage-backed securities and its new term auction facility introduced last year.
He said New Zealand was in a stronger fiscal position than many other countries and had a well-capitalised banking system, putting it in a good position to weather the storm. The huge financial downdrafts hitting the economy would lead to greater pricing and wage-setting restraint, moderated employment plans, and higher hurdles for investment.
New Zealand did not face the risk of a dangerous escalation in the burden of its foreign-currency liabilities if the exchange rate falls, as often happens in emerging market crises, he said. But borrowers would have to expect that foreign lenders would demand higher margins as a result of tight global credit markets.
Ratings agency Standard & Poor's has warned it could cut New Zealand's foreign currency rating if external imbalances begin to pressure investment, growth and fiscal performance. The current account deficit stood at 8 percent of gross domestic product in the year to September 2008. Other data on Friday showed new building approvals stayed around record low levels in December, giving further evidence of a deepening recession and backing for central bank's recent aggressive rate cutting.
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