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MNI INTERVIEW: Kiwi Strength Could Prompt RBNZ Cut-McDermott

RBNZ Could Cut To As Low As 0.05%

Further Kiwi Appreciation Would Be Problematic

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The strength of the New Zealand dollar has put the central bank's "warning lights on amber," a former Reserve Bank of New Zealand assistant governor and chief economist told MNI, adding that it might have room to cut interest rates to as low as 0.05% should the kiwi continue to appreciate.

John McDermott, who was at the RBNZ for a decade until 2018 before moving into private consulting, said in an interview that the central bank has around "20 basis points up their sleeves if they really wanted to." Further interest rate cuts were a more likely response than additional unconventional policy measures, he said.

The NZD is at around US67 cents this week after hitting US57 cents in March.


At current levels, McDermott said he thought policy makers would be "scratching their heads and wondering" if the Kiwi unit was too high, but were unlikely to act. If it rose to US70 cents, however, "that could be a problem" for the NZ economic recovery, McDermott said.

The RBNZ's official cash rate is at a record low 0.25%, the same as official rates at the Reserve Bank of Australia, but McDermott said that because of the different corridor system used by both banks effective market rates were slightly higher in NZ.

"Normally 15 basis points is chicken feed, but right now with interest rates so low that could be a reason that people are moving to the NZD just for that extra bit," McDermott said.


The RBNZ still had some "conventional monetary policy room to move" in the event of a higher NZD, and the bank could do down as low as 0.05% or 0.10% without the technical issues posed by zero rates.

"So I'd say they have 20 basis points up their sleeve if they really wanted to use it."

The RBNZ has not ruled out additional unconventional monetary policy measures such as zero rates or the purchase of foreign assets, but McDermott said he believed the bank was currently in a "wait and see mood" and was recalibrating policy as it waits to see the strength of the economic recovery.

NZ has moved off stage four lockdowns and the domestic economy has re-opened. While McDermott said it was "roaring back" there are still pockets of weakness in export industries such as tourism, which remains closed to international visitors.

The full picture would not be known until GDP numbers were published in September, he said, but with the exception of export service industries like tourism and international education other indicators were showing a "very big rebound."

MNI Sydney Bureau | +61-405-322-399 |