NZ dollar falls as OCR holds steady

The New Zealand dollar fell sharply and kept on falling after the Reserve Bank of New Zealand (RBNZ) this morning held the official cash rate (OCR) at 3 per cent but signalled a longer pause in rate increases than expected.

Releasing the September Monetary Policy Statement (MPS), Reserve Bank Governor Alan Bollard said the pace and extent of further OCR increases was likely to be more moderate than was projected in the June MPS.

He said that while global and domestic economies continued to recover, the outlook had weakened since June.

The Canterbury earthquake had significantly disrupted economic activity and was likely to continue to do so for some time yet.

The New Zealand dollar immediately slipped half a US cent to around US72.66c and more than A1c against the aussie to around A77.50c -- its lowest level since April. It fell further to be US72.46c and A77.36c at 5pm.

BNZ markets strategist Mike Jones said the fall in the kiwi looked appropriate following the MPS.

"The statement was very dovish and the Reserve Bank has taken an axe to its interest rate forecasts, implying we won't see any more interest rate increases in 2010," he told NZPA.

"That was probably more dovish than markets had expected and the currency has fallen accordingly."

ASB's economists said that it was likely that the NZ dollar would remain weak, as New Zealand interest rate markets adjust lower. Swap rates dropped on the announcement, with short-term rates dropping around nine basis points.

"But we wouldn't get too bearish on the NZ dollar, given the environment of low volatility and the relative yield pick-up still offered by New Zealand term-rates," ASB said.

The trade weighted index was 66.83 at 5pm from 67.35 at 8am and 67.49 at 5pm yesterday.

- NZPA