KEY POINTS:
The NZ$ fell befow 75 US cents in overnight European and North American trading, its lowest level in eight months.
The impact on inflation from further falls will be significant, with many costs likely to rise sharply. The retrenchment of the exchange rate from 80 US cents to 75 US cents - just by itself - is a cost increase of over 6 per cent for those goods priced in US dollars.
The Reserve Bank has recently signalled an easing in the OCR, maybe as soon as July, to help mitigate the effects of a stalling economy. But that policy switch runs the distinct risk of exacerbating the exchange rate fall, and increasing the inflationary effect.
Official focus on protecting our economic growth contrasts with a co-ordinated series of moves from northern hemisphere central banks who are recognising the threat from rising inflation.
Some analysts here are predicting an OCR easing from 8.25 per cent to 6.25 per cent over this policy cycle, whereas other economies will be raising their rates in the inflation fight. If both moves are as predicted, the yield advantage the NZ$ currently enjoys could dimish to a meaningless level. Such a senario will remove the rate-attractiveness we have, and open the door to significant currency depreciation.
And that will see substantial cost increases for imported goods, way higher than even the current levels of inflation.
- INTEREST.CO.NZ
