The New Zealand dollar has dropped to its lowest level in almost four years after the Reserve Bank signalled it would consider changing interest rates in the future.
The kiwi fell as low as 73.21 US cents from 74.23 cents immediately before the central bank’s statement at 9am.
It dropped to a seven-week low of 92.50 Australian cents from 93.39 cents.
The two-year swap rate declined seven basis points to 3.55 per cent as traders increased bets the bank could lower the official cash rate from 3.5 per cent.
The NZ Reserve Bank kept interest rates on hold at 3.5 per cent, following speculation that it would cut rates.
Governor Graeme Wheeler said inflation could turn negative and its return to within the bank’s 1-3 per cent target band may occur “more gradually that previously anticipated”.
While he was cautiously optimistic about the NZ economy, he said the NZ dollar was too expensive.
“While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.”
“We expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data,” he said.
That marks a significant shift in the language of the Reserve Bank, which hasn’t cut interest rates since since former governor Alan Bollard slashed the OCR to a record low 2.5 per cent in March 2011.
In last month’s monetary policy statement, Mr Wheeler reiterated that hikes in the OCR were “expected to be required at a later stage”.
“The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected,” said Westpac’s Imre Speizer.
“This is a watershed moment – the RBNZ has held a tightening bias in one form or another since July 2013.”
Westpac expects an increase in the OCR in June 2016, but with a 20 per cent probability of a rate cut.
Traders say the kiwi may have further to fall, given increased prospects of a rate cut and the central bank’s reiteration that the kiwi remains “unjustifiably high” and that it expects to see “a further significant depreciation”.
“That could see the kiwi move toward the bottom of the band, 72 to 73 US cents, in the next couple of weeks,” said ASB’s Tim Kelleher.
– with AAP