New Zealand Dollar Falls to Six-Month Low After Rate Reduction

By Candice Zachariahs

July 24 (Bloomberg) -- New Zealand's dollar declined to the lowest in six months after the Reserve Bank of New Zealand cut its benchmark interest rate by a quarter percentage point to 8 percent, the first time in five years, to boost economic growth.

The kiwi, as the currency is nicknamed after the flightless birds native to New Zealand, dropped for a seventh consecutive day on concern that the currency would lose its appeal among international investors seeking higher-yielding assets.

``The move to weaken the kiwi is to be expected,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets. ``The cut wasn't fully priced in. It's obviously a surprise to the market.''

The dollar fell 1 percent to 74.44 U.S. cents at 9:15 a.m. in Wellington, from 75.16 cents late yesterday. It touched 77.21 U.S. cents, the lowest since January. The currency bought 80.25 yen, compared with 81.01 yen yesterday.

Just four of 15 economists surveyed by Bloomberg News last week predicted today's decision. Eleven expected no change until the next review on Sept. 11.

Before the cut, New Zealand's cash rate was at a record 8.25 percent, compared with key rates of 2 percent in the U.S. and 0.5 percent in Japan, making the New Zealand dollar a favorite with investors seeking higher yields.

Central bank Governor Alan Bollard said June 5 that it's likely he will cut rates this year as a slowing economy cools inflation. The economy contracted 0.3 percent in the first quarter.

Slowing Growth

New Zealand's economy contracted in the first quarter, putting the nation on the brink of its first recession since 1998, as drought, a slumping housing market and rising credit costs stall spending. Bollard says economic growth is slowing enough to ease wage demands and return inflation below the 3 percent limit of his target range within two years.

Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.

Bollard was under pressure to cut interest rates to help New Zealand avoid a prolonged recession. In June, he said he couldn't rule out the possibility of the economy contracting amid a drought, record-high gasoline prices and a slumping housing market.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net