NZ dollar slips as Bollard holds to rates timing

New Zealand's dollar fell after the central bank kept its policy assessment virtually unchanged from its review in December, saying the nation's economic recovery will be subdued.

Governor Alan Bollard kept the official cash rate unchanged at 2.5 per cent, as expected, and reiterated the likely mid-year timing for a start to interest rate hikes. "The relatively sluggish recovery predicted in recent statements continues to play out," he said in Wellington today.

The central bank predicts the trade-weighted index of the kiwi dollar will average around 64.5 through 2010 before declining next year, as trading partner activity picks up and global interest rates rise. The TWI dropped to 64.89 after today's statement from 65.15 immediately before the release.

Bollard pointed to subdued house sales and credit growth, and weak business spending as hallmarks of a recovery that's been more muted than many analysts had expected.

"Our core view remains for a 25 basis point hike in the OCR in June," said Philip Borkin, New Zealand economist at Goldman Sachs JBWere. "However, we still believe the risks are skewed towards a later start if the recent tenor of the data continues to highlight a sluggish recovery."

The kiwi dollar sank to 70.17 US cents from 70.56 cents immediately before the MPS.

It declined to 76.71 Australian cents from 77.05 cents and traded at 63.52 yen from 63.86 yen. The New Zealand dollar declined to 51.35 per euro from 51.63 and fell to 46.80 British pence from 47.05 pence.

Today's statement from the Reserve Bank forecasts the TWI will have fallen to 61.9 in the fourth quarter of 2011.

"On the global front, trading partner growth has been revised higher due to stronger than expected growth from Asia," said Jane Turner, economist at ASB. "However, the RBNZ note an increase in the downside risks, particularly stemming from fiscal consolidation issues in Europe," she said.