KEY POINTS:
The kiwi dollar is likely to push to fresh highs after data yesterday showed the Reserve Bank still has not got inflation under control and may have to lift interest rates again next week.
After the release of the consumer price index yesterday, the kiwi jumped to its
highest level since it was floated 22 years ago, rising to almost US75c. It hit a high of US74.93c, above a previous high of US74.65c in March 2005.
"We've seen every man and his dog buying the kiwi," said Bank of New Zealand currency strategist Danica Hampton, who predicted the currency would go higher still.
The rise of 0.5 per cent in the CPI in the March quarter "really reiterates the case that if [the Reserve Bank] wants to contain medium-term inflation they probably have further tightening to do and we expect them to hike next week".
A rise next Thursday would put the official cash rate at 7.75 per cent, among the highest in the developed world, and further increasing the attractiveness of Kiwi rates for foreign investors.
Hampton said the dollar could rise to US75.50c ahead of next Thursday's interest-rate decision.
Deutsche Bank currency strategist John Horner said the kiwi's gains would continue for three reasons - the strong domestic economy was pushing interest rates higher, commodity prices remained high, and "the US dollar is firmly in a down trend".
"The trend in kiwi does look pretty healthy for now," he said, but added it was difficult to make predictions about how high the currency might go because it had never been this high before.
"We've broken past levels where we can reasonably project."
Statistics New Zealand said the CPI rose 0.5 per cent in the March quarter and 2.5 per cent annually.
In the December quarter, the CPI fell 0.2 per cent but was up 2.6 per cent for the year.
Yesterday's numbers were slightly below the market consensus but above the Reserve Bank's forecast of inflation for the quarter of 0.3 per cent and was seen by some economists as increasing the likelihood that Reserve Bank Governor Alan Bollard would lift interest rates.
Of particular concern to Bollard would be that non-tradeables inflation - that is domestic inflation - was up to 4.1 per cent annually from 3.8 per cent three months ago, a sign that domestic demand remains strong.
"Inflation pressure is becoming problematic," said ANZ chief economist Cameron Bagrie.
The bounce back in the economy late last year was starting to spill over into inflation and Bollard would probably lift interest rates next week.
"Seeing those inflation numbers, and particularly the non-tradeable inflation numbers, they're very clearly picking up and in that situation time's no longer on his side," Bagrie said. "The Reserve Bank has got to send a clear message to the domestic economy."
Under the terms of his agreement with the Government, Bollard is required to keep inflation between 1 and 3 per cent "on average over the medium term" while avoiding unnecessary instability in output (economic growth), exchange rates and interest rates.
First NZ Capital economist Jason Wong also expects rates to rise next week, saying that since Bollard last lifted rates in March "the run of economic data has been unfriendly, with more signs of improving domestic demand growth, higher house price inflation, a tighter labour market and now stronger non-tradeables inflation".
However, Deutsche Bank head of research David Plank said that although there was a strong argument for a rate rise next week, Bollard was unlikely to lift rates.
"We know that he's reluctant to tighten further," he said.
"I don't think there was anything in the CPI data that would make him conclude that he needs to tighten."
Horner said the fact that the annual CPI was just 2.5 per cent and that the higher dollar would further reduce tradeables inflation - or inflation of imported goods - would prompt Bollard to hold rates next month.
"On balance, he'll opt to wait to June and then he'll have no alternative but to tighten."
Steady climb
* The dollar hit US74.93c yesterday thanks to strong inflation.
* That was the highest level since it floated in March 1985.
* But the kiwi has been higher - it was worth US$1.49 in October 1973.
* In October 2000, the kiwi dropped to US38.95c.