By Brian Fallow
WELLINGTON - Ninety-day bank bill yields briefly topped 5 per cent yesterday, for first time since October last year, as the New Zealand dollar hit six-year lows on a trade-weighted basis.
After dropping to 54.6, its lowest since mid-1993, the TWI had by the end of the day recovered some of its composure, closing around 55.3.
Analysts said the drop in the TWI had more to do with the US dollar's weakness, especially against the yen, than New Zealand-specific factors.
Because of the way the TWI is constructed a weaker greenback pulls the index down unless or until there is an offsetting rebound in the $NZ-$US exchange rate. That eventuated yesterday afternoon and the kiwi, which had briefly dipped below 51USc, ended the day around 51.6c.
The TWI's fall pushed the monetary conditions index below minus 400 and prompted a reflexive rise in the 90-day interest rate to 5.03 per cent. It ended at 4.99 per cent.
Ninety-day yields have risen a quarter of a per cent over the past two weeks in the wake of Reserve Bank governor Don Brash's statement that a rise in the official cash rate was increasingly likely before the end of the year.
Despite the prospect of a tightening, the kiwi dollar has come under downward pressure over the same period, losing nearly 2c against the US dollar.
Deutsche Bank fixed income strategist David Plank said investor sentiment since the Reserve Bank statement had been very negative and the bond market had performed poorly.
"The market's perception is that the economic justifications for the tightening aren't all that strong. It raises questions about the bank's approach and whether you want to hold New Zealand assets. When you get higher interest rates and a lower currency that tells you the risk premium has gone up," Mr Plank said.
One consequence has been that monetary conditions have become substantially (nearly 200 MCI points) easier than the Reserve Bank forecast for the second half of the year. This has raised speculation that the bank might raise interest rates at its next six-weekly review on September 29, rather than waiting until the next monetary policy statement on November 17.
That would be damaging to the bank's credibility and increase the risk premium on New Zealand assets, Mr Plank said.
The official cash rate regime had only been in place since March, and intra-quarter monetary policy moves had often proved to be mistakes.
Analysts said the market had shrugged off Government warnings that the fiscal surplus for the 1998/99 year would come in lower than the $2.2 billion forecast in the May budget.
Finance Minister Sir William Birch said "one significant change" was the actuarial valuation of the Crown's liabilities under the Government Superannuation Fund, the public service's pension scheme.
Short rates leap as kiwi slumps
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