Long standing concerns about the size and sustainability of New Zealand’s current account deficit were rekindled by the worse-than-expected data.

“The current account deficit is 9.3 percent of GDP, much too high for the market’s liking, particularly as attracting capital flows is becoming more difficult,” said Ashley Davies, currency strategist at UBS in Singapore.

The kiwi fell immediately following the release of the data, and later dropped further on comments by ratings agency Standard and Poor’s that the deficit remained a risk for New Zealand’s sovereign rating.

Investors had been expecting the current account deficit to worsen but were taken aback when the annual deficit hit a record NZ$14.54 billion ($9.03 billion) driven by poor trade performance and foreign investors repatriating hefty profits from their New Zealand assets.

Economists generally agreed that the deficit had a little further to go before it peaked, but ANZ-National Bank’s head of market economics Cameron Bagrie doubted it would be the determining factor in any further weakness in the kiwi.

“To get the second big drive lower in the New Zealand dollar from here I think is still yield-dependent, as opposed to being dictated by an imbalances theme,” Bagrie said.

Attention now turns to Friday’s first quarter growth data, with a soft number likely to be a catalyst for another lurch lower in the kiwi.

SOURCE: REUTERS

Bollard said that given the unavoidable nature of the oil price rises, it would be inappropriate to raise interest rates in response.
“We do not expect to tighten policy in response to the high headline inflation in the short term,” Bollard said.
“But equally, we cannot afford to ease policy until we have more certainty that future inflation outcomes will be trading down comfortably below three percent.”

The central bank expects inflation to remain above three percent well into next year.
Reiterating comments made earlier in the year, Bollard said he did not expect to lower interest rates this year despite the rapid slowing of the economy.

Economic growth is expected to slow to 1.6 percent in the year to March 2007, before rising to 2.7 percent the following year.
“Export growth will recover as a result of the lower exchange rate and buoyant demand in world markets,” Bollard said.
“At the same time, household spending will be constrained by a continued weakening in the housing market, high petrol prices and a slowdown in employment growth.”

Many economists had been predicting a cut in the official rate later this year despite repeated indications to the contrary by Bollard. But worsening inflation pressures and a more hawkish tone from Bollard on inflation are making some take a second look at those predictions.
Westpac Bank senior economist Nick Tuffley said the scenario of no rate cut this year was looking increasingly likely.

“The risks to our call for a cut in October are all skewed one way,” Tuffley said.
“However, the Reserve Bank risks overestimating both growth and inflation over the next year, and rate cuts are less distant than it perceives,” he said.

ANZ Bank economists agreed the higher inflation risk made a cut less likely before 2007 but added that any evidence of a sharp weakening of the economy later this year could leave scope for a cut.

“We continue to believe the Reserve Bank will have scope to cut the official rate by the end of the year although this will still require a huge leap of faith on the inflation front,” they said.
ANZ is expecting a relatively strong March quarter gross domestic product number — which is due on June 23 — but economic data will again turn weaker afterwards.

“We expect such a change in domestic data to once again turn the markets attention back to an easing theme sooner rather than later.”

The decision to leave interest rates unchanged was widely expected by financial markets.

SOURCE AFP