RBNZ Welcomes Weaker Kiwi Dollar as Catalyst to Revive Economy
(Bloomberg) -- New Zealand’s central bank is welcoming a weaker exchange rate, saying it will help to revive economic growth this year.
“The lower kiwi dollar is part of the reason we’re predicting growth to return over 2025 or from the end of 2024,” Reserve Bank Chief Economist Paul Conway said in an interview Friday in Wellington. It “is going to support export incomes along with good commodity prices for dairy and beef,” he said.
The New Zealand dollar has dropped 6.4% against its US counterpart over the past six months, the worst performance among the 10 most-traded currencies. That has coincided with monetary policy easing in New Zealand as well as the election of Donald Trump as US President, which has pushed up US interest rates and made the greenback more appealing.
The RBNZ this week cut its Official Cash Rate by 50 basis points for a third straight meeting, taking it to 3.75%, and predicted the economy will grow 2.4% this year after contracting an estimated 1.4% in 2024. Increases in exports and tourism — which together make up about 30% of the New Zealand economy — should offset a sluggish housing market and weak business investment.
Governor Adrian Orr said this week that the New Zealand dollar is trading around fair value. It bought 57.66 US cents at 2:20 p.m. in Wellington.
Conway said the RBNZ “is pretty agnostic” on the level of the kiwi. However, he said if its drop is a response to economic fundamentals and differences across countries then that is helpful as a shock absorber for the economy.
“I have no particular view on the optimal path for the exchange rate going forward. We’ll take what we’re given,” he said.
Rate Outlook
Conway reiterated that the RBNZ’s new forecasts suggest the cash rate will drop a further 75 basis points to 3% over coming quarters, with 25-point steps likely at the April and May policy decisions, though he cautioned that the projections are always conditional.
Asked about the bank’s expectation that domestic or “non-tradables” inflation will stay around 3% over the forecast horizon, Conway said that was consistent with headline inflation of 2%.
While the headline rate is forecast to pick up to 2.7% this year, the RBNZ doesn’t think it will become embedded in price and wage-setting and is happy to look through that blip, he said.
Conway noted excess capacity in the economy and said the “significant” output gap is “indicative of an economic environment where it would be challenging for firms to increase their prices or for workers to overreach on pay demands.”
That’s one reason why policymakers currently see no prospect of rate increases on the horizon, he said. However, the possibility that the cash rate will need to be cut below 3% to a level that starts to stimulate the economy is “in the risk conversation,” Conway said.
He cited the sharp economic contraction last year, when gross domestic product shrank 2.1% in the sixth months through September, and the difficultly in predicting when the turning point would come after such a “rapid deceleration.”
“On the one hand that could take longer than what we’re anticipating which would, all else equal, imply a lower OCR track, or on the other hand, you know, once the economy does start to get a sniff of growth, it can pick up more quickly,” Conway said.
“So yeah, there’s uncertainty about that. And one world within that sort of confidence interval is a world where we have to stimulate, but it’s not our central projection,” he said.