In its report on financial stability on Wednesday, the RBNZ said that the economy might slow more than expected if the credit crisis deteriorates and this weighed heavily on the Kiwi. The RBNZ did however say that it will broaden the range of securities accepted as collateral for loans. The labour cost index (a quarterly measure of changes in labour costs per hour worked) rose 0.7% in the first quarter. The main purpose of the LCI is to identify inflation risks. We have also seen employment fall by 29,000 in Q1 which is the largest quarterly percentage decrease since 1989 and house price figures out yesterday showed a drop from 6.5% to 4.9%.

Markets now see a 50% chance of a rate cut in New Zealand in June and most economists in a recent poll by Reuters expect a cut by September. However, with both the UK and NZ looking to cut rates in the next few months we expect the Sterling-Kiwi cross to remain range-bound between 2.47 and 2.57 in the short term. With the Dovish tones coming from the UK and the RBNZ’s concerns over inflation though, we expect the Kiwi to remain quite strong against the Pound for most of the year.