Federal Reserve to raise rate – Kiwi braces for impact

The impact of that decision will reverberate around the world and reach these shores.

The New Zealand dollar fell in response to last week's announcement of a high US inflation rate, to a rate below the US$0.60 mark.

A lower Kiwi dollar brings the risk of higher inflation imported from abroad and this could lead to either raised interest rates here or cause higher rates to last for longer.

A determined campaign against inflation was pledged last month by the chairman of the Federal Reserve, Jerome Powell, speaking at a conference of central bankers in Jackson Hole, Wyoming, and he is expected to make good on that pledge tomorrow.

The Financial Times is one newspaper that expects a 75 point rise. The New York Times also expects a big jump. They were joined by the television financial news service, CNBC. Bloomberg quoted a consensus of economists that a 75 point rise was likely, but some media are saying the actual rise could be more than 75 points and rise to one entire percentage point.

The BNZ senior economist Craig Ebert says the market here has already priced in the impact of a 75 point rise. But it has only partly priced in a 100 basis point rise, and any such development would cause an impact.

“That would put rates up in America and put even more strength in the US dollar, which may cause the Kiwi dollar to fall.”

After falling below US$0.60 last week, the Kiwi recovered for a few days, before subsiding again and slipping below US$0.59.