Dollar jumps after rates hold

After the Reserve Bank left the cash rate unchanged at its June meeting, the New Zealand dollar jumped 1 per cent.

The dollar went from US70.15c just before the announcement to US71.15c just after, later easing back to US70.90.

Having cut the official cash rate five times in less than a year to an historic low of 2.25 per cent, the Reserve Bank continues to leave the door open to further easing if inflation fails to pick up.

"House price inflation in Auckland and other regions is adding to financial stability concerns," governor Graeme Wheeler said in a statement.

"Auckland house prices in particular are at very high levels, and additional housing supply is needed," he said.

Many economists are still predicting that the Reserve Bank will make further cuts this year because of pressure to get back inside its 1 per cent to 3 per cent inflation band. Inflation is currently running around 0.4 per cent.

ASB Bank said financial stability concerns appear to have influenced the decision not to cut rates. "The Reserve Bank may be stalling to allow time to introduce further macro-prudential tools," ASB economists told the New Zealand Herald.

"As a result, we continue to expect the cash rate to eventually fall to 1.75 per cent, although the Reserve Bank appears very reluctant to cut rates," ASB said.

Economists at ANZ, Westpac, First NZ Capital and Deutsche Bank all thought the official cash rate would hold at 2.25 per cent in June. Interestingly, all are picking at least one further cut this year.

In its June statement, the Reserve Bank said long-term inflation expectations are well-anchored at 2 per cent and short-term inflation expectations appear to have stabilised.

“We expect inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures,” Mr Wheeler said.

The Reserve Bank is due to meet again on 11 August.