Wellington: The New Zealand dollar has tumbled to six-month lows in the past month and may fall further, giving the Reserve Bank of New Zealand (RBNZ) room to raise interest rates again before year end.

The kiwi dollar has fallen around 5 per cent to around $0.8400 against the US dollar over the past month, taking it to levels last seen before the RBNZ began lifting rates in March.

Analysts and traders believe the New Zealand dollar’s/srecent fall priced in expectations of slower interest rate rises and weaker dairy prices, but not higher U.S. interest rates, which are expected next year.

On a trade-weighted basis, the kiwi has retreated from a post-float high of around 82.0 hit last month to 79.1 on Friday.

The index is below the RBNZ’s quarterly projections for 79.7 in the third quarter, and fast nearing its projection of 79.0 for the fourth quarter.

“In isolation, if the currency falls at a faster pace than the RBNZ expected, or to a lower level than they expected, then there’s a greater need of tighter policy in response to that,” said Hamish Pepper, currency strategist at Barclays Capital in Singapore.

The central bank faces a careful balancing act because while the weaker kiwi make it easier to raise rates and curb inflation, a weaker currency can also import inflation, especially given expectations for continuing domestic growth.

The RBNZ has raised rates by 100 basis points since March, taking them to 3.5 per cent, their highest since early 2009. It has said it sees neutral rate levels around 4.5-5 per cent, which it expects by late 2015 or early 2016.

While it indicated a pause in tightening at its July policy review, it has flagged more rate rises over the next year or so to curb inflation, which rose to 1.6 per cent in the second quarter and is nearing the bank’s midpoint target range around 2 per cent.

Four consecutive rate rises since March have propelled the kiwi higher, and the RBNZ now fears higher rates could strengthen the currency even further, making New Zealand’s exports uncompetitive.

The bank has been actively talking the kiwi down, calling its “excessive” strength “unsustainable” and signalling it might hold back further rate rises for now.

A weaker currency, however, would make the RBNZ more comfortable about raising rates, with some analysts tipping another rise by the end of the year.

Fed factor

How soon the RBNZ raises rates next could depend on how far and how quickly the kiwi falls.

“If we see the kiwi drop suddenly down to $0.8200 in the next couple of weeks, the market would really start to think about the implications that this has for the RBNZ’s rate track,” BNZ currency strategist Raiko Shareef said.

How quickly the kiwi falls largely depends on how long it takes the market to factor in prospect for higher US interest rates.

The RBNZ became the first central bank from a developed country to tighten monetary policy in the current cycle, and at 3.5 per cent its rates dwarf the near-zero rates prevailing in many developed countries.

The kiwi outshone many major currencies in the first half of the year largely because foreign investors have chased these attractive rates rather than accept the pitiful yields on offer in US dollar, euro and yen-denominated debt.

But analysts said the kiwi would weaken further in the coming months as yields in other countries start to rise, with central banks in the United States, Britain, Canada and Australia waiting to increase their policy rates.

“If we see the kiwi fall on New Zealand-specific factors, then it won’t affect the rate projection. If you see it continue to fall because of US dollar strength, then yes... you should see more rate hikes built into the kiwi curve,” Barclays Capital’s Pepper said.

A Reuters poll shows roughly even split between economists anticipating the next rate rise in December and others who expect it early next year.

Those findings are not reflected in markets, which analysts reckon have priced in less than a 10 per cent chance of 25 basis point rate rise in December.

Both Shareef and Pepper at BarCap expect the RBNZ to raise rates by 25 basis points in December and for the kiwi to be around $0.8000 by the year end. That is weaker than a median forecast in a Reuters poll for $0.8400 in six months’ time.