Markets down following Reserve Bank announcement


BNZ economists believe the Reserve Bank will be smiling following the market's reaction to Thursday morning's economic update.

The Reserve Bank (RBNZ) clearly stated the dollar is too high, making exports too expensive, which in turn is hurting inflation.

And the markets have listened.

As of 4pm, the dollar was trading at 69.85 US cents, down from 70.20 US cents directly before the announcement.

The kiwi has also fallen against the Australian dollar to 93.26 cents down slightly from 93.90 before 9am.

In a statement, economists at BNZ said: "the RBNZ should be feeling a bit happier about its lot after a series of statements that have driven the currency lower and got the market pricing in further easings".

"This is a great first step for the Bank but we have to stress that the level the RBNZ had assumed the TWI to average across Q3 is still much lower at 71.6."

The Reserve Bank noted in their announcement, the Trade Weighted Index was six percent higher than assumed in its June Monetary Policy Statement.

"The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed," the Reserve Bank said.

The TWI has dropped from 75.3 before 9am to its low point at 74.7 before bouncing back slightly to 74.96 just before 4pm.

The BNZ economists also said they are sticking with their view that the RBNZ will cut the OCR in August.

"[This is] a view that is now almost fully priced in by the market. The market has also fully priced in a second cut by February with the possibility of one more thereafter."

However the bank believes RBNZ are considering a second cut, it might come sooner than expected.

"It is highly unlikely the RBNZ would wait until next year to do so. Formally, we have November pencilled in but a further reduction in September is a real possibility as, indeed, is the possibility of even more."