Dollar to continue freefall, says economist

A leading economist expects the New Zealand dollar to fall to US50c by late this year or sometime next year.

ANZ National Bank acting chief economist Cameron Bagrie also sees an opportunity for this country to follow the lead of Australia and go through a period of consolidation.

The kiwi slipped below US60c for the first time in nearly two years yesterday, although overnight it crept back above that level. So far this year the currency has slid about 12 per cent.

Mr Bagrie told NZPA today the country had been borrowing and spending its way to growth, but he thought New Zealanders would now follow the lead of Australian consumers.

For the past 18 months Australia had been getting good wage and employment growth, he said.

"But house prices have been flat as a pancake and retail sales growth has been 3 per cent. So households over there have started to consolidate, rebuild a precautionary savings buffer."

Fundamentally a weaker currency was not a good thing because it lowered the country's wealth, making everyone in the country poorer, Mr Bagrie said.

"But the other way to look at it is that our export sector's been getting crunched, we've been very reliant upon domestic-led growth that has led to some pretty massive imbalances within your economy, including a 9 per cent current account deficit.

"So we do need that lower currency to help rebalance growth away from the domestic economy and towards the earnings and the export sector."

By late-2006 or 2007 he was expecting the kiwi to reach US50c as this country's interest rates fell, while those of some major economies rose.

In 2007 the New Zealand cash rate would probably be 5.5 per cent, while the US rate would be 5 to 5.25 per cent, Japan would have positive interest rates and European rates would be higher, Mr Bagrie said.

On top of that was an "absolutely massive uridashi redemption profile". Uridashi are bonds targeted at Japanese retail investors in New Zealand dollars.

"They will cash those in because the yield they will get in 2007 just will not be attractive for them to want to roll those over and reinvest."

Fair value for the New Zealand dollar was probably around US60c to US62c, but when currencies moved they seldom stopped at fair value, tending to spend a period either over valued, or under valued.

He doubted inflationary pressure, other than that from petrol prices, would kick in while the New Zealand currency remained above US60c, but he did expect some imported inflation pressure once the kiwi was falling below US60c.

Typically in currency cycles, margins on goods were "fattened" when a currency strengthened, while the first leg of a currency's decline was "liposuction", Mr Bagrie said.

A comparison between vehicle prices and the movement of the New Zealand dollar showed margins had been built up in the past three years.

As a currency fell "people take things on the nose", but a point would be reached at which firms would have to try to pass on price increases. His feeling was that point would be just below US60c.

Hopefully that imported inflation dynamic would not be seen until late-2006, by which time the housing market should have cooled a little further, meaning the headline inflation rate should still be around 2.5 to 3 per cent, he said.

His feeling about the New Zealand economy now was that, borrowing the words of former Prime Minister David Lange, the country had stopped for a cup of tea.

"I don't think it is doom and gloom. New Zealand had an extraordinary strong run of growth. Now I get the feeling that businesses and consumers are going to consolidate for the next 12 months."

- NZPA