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RBNZ Holds Key Rate as Wheeler Targets Strong Kiwi, Housing

New Zealand’s central bank expects to keep borrowing costs at a record low this year to avoid re-igniting demand for the currency, which it said remains overvalued. The kiwi declined.
“Despite having fallen over the past few weeks, the New Zealand dollar remains overvalued and continues to be a headwind for the tradables sector,” Governor Graeme Wheeler said in a statement in Wellington today after leaving the Official Cash Rate at 2.5 percent. The bank cut its growth forecast for the year through March 2014 to 3 percent from 3.3 percent, and left its projection for the following year at 2.8 percent.
Confronted with a surging housing market that threatens financial stability and an elevated currency that dents exports, Wheeler has kept interest rates steady and turned instead to other policy tools. He reiterated today the RBNZ will seek to intervene in the foreign-exchange market where appropriate.
“If we see the opportunity to try for example to take the tops off any exchange-rate peak, then we may exercise intervention,” he said. “If there were very strong capital flows, we wouldn’t try to become engaged and try to offset those in any substantive way.”

Dollar Weakens

New Zealand’s dollar dropped to 79.54 U.S. cents at 10:55 a.m. in Wellington from 79.90 cents before the decision. Traders pared bets the RBNZ will lift rates in December to a 30 percent chance from 54 percent late yesterday, according to swaps data compiled by Bloomberg.
“The governor was seen as not hawkish enough,” Annette Beacher, Singapore-based head of Asia-Pacific research for TD Securities, said in an e-mailed note. Wheeler today reiterated the Reserve Bank of New Zealand expects to keep the OCR unchanged through the end of the year, and it seems currency traders “wanted this dropped or altered,” she said.
The currency has declined about 6 percent against the greenback since Wheeler first said on May 8 he was intervening to weaken it. He sold a net NZ$256 million ($203 million) in April, according to central bank data. In a May 30 speech, Wheeler said he was prepared to step up his efforts.

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