* Dairy price bounce takes some pressure off beleaguered
* But high NZ dollar puts pressure on exporters
* Central Bank may be forced to cut rates to rein in high
By Rebecca Howard
WELLINGTON, Sept 21 A sharp bounce in the price
of milk is a welcome sign for Manawatu dairy farmer Andrew
Hoggard. But it is a headache for New Zealand's central bank as
the ensuing surge in the 'kiwi' dollar threatens to undermine
the export-led economy and force more rate cuts.
Whole milk powder prices - the staple of New Zealand's dairy
export basket - reached one-year highs this month as a global
supply glut showed signs of easing.
"Things are still very volatile out there but there are
enough signs around us that we can err on the side of thinking
it's potentially the start of a recovery," said Hoggard, whose
dairy farm north of the capital city of Wellington handles 550
Indeed, the price recovery is bringing some relief to
farmers - 85 percent of whom are still operating at a loss - and
giving a boost to the dairy sector, which accounts for around a
fifth of New Zealand's export revenue and remains the backbone
of the Pacific island nation's economy.
The trouble is the milk bounce is fueling an upswing in the
New Zealand dollar, making it tough for other exporters and
sectors such as tourism - a potential risk for the economy which
grew at its fastest pace in two years in the second quarter.
That is putting the onus on the Reserve Bank of New Zealand
to cut rates again from the current record low 2.0 percent - if
not at Thursday's meeting, then soon after as the high local
dollar is also crimping already low inflation.
"We expect further policy easing to be signaled, leaving the
door well and truly open to a November cut. The strong NZD will
continue to make it difficult for the bank to meet its inflation
objective," said ANZ chief economist Cameron Bagrie.
The central bank, which has cut rates twice this year, has
repeatedly said the kiwi needs to be lower to support the
export-led economy. In fact, at its August rate review the RBNZ
said it opted to cut rates by 25 basis points to a record low of
2.0 percent as "additional monetary policy stimulus is needed to
help lower the exchange rate."
STRONG KIWI PRESSURES EXPORTS
The kiwi, as the New Zealand dollar is popularly known, has
been underpinned this year by the country's attractive policy
rate compared to negative or ultra low rates in Japan, Europe
and the United States.
It is around 17 percent higher against the U.S. dollar from
a year ago, and is heading toward parity with its Australian
counterpart for the first time since the two currencies were
This is pressuring sectors such as meat exporters, which
make up over 10 percent of New Zealand's overseas sales.
Murray Brown, general manager sales for Alliance Group Ltd.,
a New Zealand meat cooperative, said the kiwi's move was too
"big a hurdle" for exporters to recover through prices and a
lower currency "would definitely be better."
Tourism, which at NZ$30-billion-a-year is New Zealand's
biggest export earner, is another sector facing a bumpy ride.
"A strong New Zealand dollar does provide a headwind for
tourism," said Tourism Industry Aotearoa Chief Executive Chris
To be sure, the kiwi is also taking some of the gloss off
the bounce in the dairy sector, which has been crunched in
recent years by a slowdown in major consumer China and the
Dairy prices are still around half of what they were in 2013
even after a 30 percent jump since early August..
On Wednesday, dairy giant Fonterra Wednesday raised its
forecast payout to its farmer shareholders for the current
season. But Fonterra Chairman John Wilson cautioned that the
high New Zealand dollar "is offsetting some of these gains" in
All of this may prompt RBNZ Governor Graeme Wheeler to
deliver an explicit easing message on Thursday.
"Governor Wheeler isn't going to stop the runaway kiwi train
by shouting at it, more action will be required," said OM
Financial economist Stuart Ive.
(Reporting by Rebecca Howard; Editing by Shri Navaratnam)