NZ Dollar forex rate may falls soon as Reserve bank holds OfficialCashRate 2%

The Reserve Bank has left the Official Cash rate at a record low 2 percent in its latest announcement this morning.

Governor Graeme Wheeler said the domestic economy was robust on the back of strong migration and tourism, construction activity and low interest rates.

But he said weak global conditions and low international interest rates had pushed up the dollar, which needed to fall.

Mr Wheeler said further rate cuts would likely be needed to ensure inflation returns to the bank’s 2 percent target. Bank  give a signal that, it may  go  rate cut again below 2%,if the dollar price is still show stronger , it will adversely affect export .Analysts have picked November, when the central bank will have more information about inflation.The decision follows the United States Federal Reserve keeping rates unchanged, though a hike was expected by the end of the year.

The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank to meet the inflation target specified in the Policy Targets Agreement (PTA). The current PTA, signed in September 2012, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.

The OCR was introduced in March 1999 and is reviewed seven times a year by the Bank. Monetary Policy Statements are issued with the OCR on four of those occasions. Unscheduled adjustments to the OCR may occur at other times in response to unexpected or sudden developments, but to date this has occurred only once, following the 11 September 2001 attacks on the World Trade Centre in New York

What the OCR does

The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. An OCR is a fairly conventional tool by international standards. In the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. Such mechanisms were more indirect, more difficult to understand, and less conventional.

How the OCR works

Most registered banks hold settlement accounts at the Reserve Bank, which are used to settle obligations with each other at the end of the day. For example, if you write out a cheque or make an EFTPOS payment, the money is paid by your bank to the bank of the recipient. Many hundreds of thousands of such transactions are made every day. The Bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.

The New Zealand dollar has fallen slightly after the decision, after it had gained nearly half a cent this morning after the US decision.