NZ dollar gains on Wheeler stimulus signal

The kiwi was little changed at 84.15 US cents at 8am in Wellington from 84.13 cents at 5pm yesterday.

The New Zealand dollar gained after the Reserve Bank said it will need to remove monetary stimulus as heat in the housing and construction sector spills over into the broader economy and stokes inflation.

The kiwi dollar climbed to 79.75 US cents after governor Graeme Wheeler's statement, from 79.30 cents immediately before. The trade-weighted index rose to 75.51 from 75.17 and the kiwi advanced to 86.91 Australian cents from 86.52 cents.

"Growth in the New Zealand economy is picking up and, although uneven, is becoming more widespread across sectors," Wheeler said in today's statement. The removal of monetary stimulus "will likely be needed in the future," a change from the wording of the June monetary policy statement, when he only said the official cash rate was expected to be unchanged through the end of the year.

"That's more hawkish than just saying they're on hold," said Robin Clements, economist at UBS New Zealand. "Some would argue, like myself, that data already is pretty hot. The only thing that's not hot is inflation."

Wheeler also watered down his view of the kiwi dollar, which has declined since the June MPS.

"Despite having fallen on a trade-weighted basis since May 2013, the New Zealand dollar remains high and continues to be a headwind for the tradables sector, restricting export earnings and encouraging demand for imports," he said.

That's a softer view than last month, when he explicitly said the kiwi was over-valued.

The kiwi dollar averaged 76.55 in the second quarter on a trade-weighted basis, below the Reserve Bank's projected 77.50.

Wheeler said inflation is expected to trend upwards towards the mid-point of the 1 per cent to 3 per cent target band as growth accelerates over the coming year. Inflation was just 0.2 per cent in the second quarter, pushing annual inflation down to a 14-year low of 0.7 per cent.

Traders have increased bets the central bank will hike the official cash rate from a record low 2.5 per cent in the next 12 months after Wheeler kept the rate at a record low today as expected. They see 54 basis points of increases, based on the Overnight Interest Swap curve, up from the 39 basis points they were expecting previously.