Inflation expectations fall to 20-year low
By Paul McBeth
The New Zealand dollar fell as firms' inflation expectations fell to the lowest level in more than two decades, stoking speculation the Reserve Bank may have to cut interest rates.
The kiwi dropped to 66.03 US cents from 66.63 cents immediately before the release of the central bank's quarterly survey of expectations, and down from 66.55 cents yesterday. The trade-weighted index decreased to 71.68 from 72.15.
The Reserve Bank's survey of expectations showed respondents see annual inflation one year out at 1.09 percent, down from the 1.51 percent rate seen in the last survey three months ago, and the lowest level since 1994.
New Zealand's annual pace of inflation is currently at 0.1 percent, and has been below the central bank's target band of 1-to-3 percent for more than a year, fuelling expectations governor Graeme Wheeler will have to lower the 2.5 percent official cash rate.
"Central banks get quite uncomfortable when expectations fall or stay low," said Matt Blackwell, a director at OMF in Auckland.
Traders will be watching the GlobalDairyTrade auction overnight for a gauge on how New Zealand's biggest export sector is tracking.
OMF expects prices will fall 7 percent at the GDT auction, which will add pressure to the kiwi dollar, Blackwell said.
Government data on Tuesday showed the volume of retail sales rose 1.2 percent in the final three months of the year, missing economists' expectations, while Finance Minister Bill English said the government has flexibility over the timing of $3.5 billion of spending increases over the coming two years.
The local currency edged down to 59.20 euro cents from 59.32 cents on Monday and was little changed at 45.75 British pence from 45.82 pence.
The New Zealand dollar fell to 4.3005 Chinese yuan from 4.3263 yuan on Monday and sank to 92.16 Australian cents from 92.95 cents. It was almost unchanged at 75.82 yen from 75.81 yen.