Dollar spikes on OCR

By ELLEN READ

The New Zealand dollar rose to 56.8USc yesterday after the Reserve Bank's decision to keep the official cash rate at 5.75 per cent.

The no-change scenario was expected by economists, but the currency rallied as Reserve Bank Governor Alan Bollard trimmed investors' hopes of an imminent rate cut.

He said the domestic economy had been more robust than expected. Rate cuts foreshadowed at the bank's January review remained possible but would happen only after the bank saw inflation fall comfortably within its 1 to 3 per cent target range.

The kiwi immediately rallied half a cent to match last week's five-year high, but retreated to about 56.5USc after the initial excitement.

Westpac's treasury economist, Nick Tuffley, said the market had expected the central bank to cut interest rates sooner.

He said the appeal of the kiwi to overseas investors would remain for several months.

The bank's decision marked the eighth straight month without change.

New Zealand's official cash rate is now the highest of 11 leading central banks after Norway cut its rate to 5.5 per cent a few hours earlier.

The kiwi has gained more than 30 per cent against the greenback in the past year, helped by local interest rates 4.5 percentage points higher than in the US.

Investors like putting their money here because they get higher returns than in other countries - and in order to invest here, they have to buy local currency, hence a greater demand and so the price of the kiwi goes up.