Kiwi holds gains after Reserve Bank keeps rates unchanged

BUSINESSDESK: The New Zealand dollar held gains in local trading after getting a leg up from the Reserve Bank decision to keep interest rates on hold inflation expected to speed up, even after last week's benign consumer prices figures.

The kiwi rose to 79.11 US cents at 5pm from 78.88 cents immediately before the announcement at 9am, and was up from 78.31 cents yesterday. The trade-weighted index advanced to 71.81 from 71.26 yesterday.

Central bank governor Alan Bollard kept the official cash rate at 2.5% for an 11th straight meeting, saying the threat of a rapid deterioration in Europe was lingering over New Zealand's trading partners.

Still, he said he expected inflation to the middle of the bank's 1% to 3% band, even after the second-quarter consumer prices index showed annual inflation was right at the bottom of the range.

Dr Bollard "pretty much kept to the script from the recent monetary policy statement, and there's been a bit of positioning as people were expecting a more negative sentiment", said Dan Bell, currency strategist at HiFX in Auckland.

The kiwi has "found support, and there's a good chance we might see a bit more of a short squeeze where it gets taken back up to the 80.50 US cents mark".

Investors were more upbeat about risk-sensitive assets in the London and New York trading sessions after European Central Bank member Ewald Nowotny threw his support behind issuing the region's rescue fund with a banking licence.

That would let the European Stability Mechanism access to cheap central bank funding.

Europe's sovereign debt woes have kept markets nervous through much of this week, after two Spanish regions said they will probably need central government bailouts, and the Mediterranean nation and Italy reinstated bans on betting against stock market declines – an action taken during the depths of the 2008-09 global financial crisis.

Mr Bell said investors are monitoring US data closely amid speculation the Federal Reserve may embark on a third round of quantitative easing in a bid to revive growth and employment in the world's biggest economy.

The New Zealand dollar rose to 61.82 yen from 61.21 yen yesterday and gained to 76.68 Australian cents from 76.48 cents. It climbed to 65.16 euro cents from 64.83 cents yesterday and advanced to 51.10 British pence from 50.45 pence yesterday.