(Updates with governor’s comment in eighth paragraph.)
June 10 (Bloomberg) -- New Zealand’s central bank may start to reverse a March interest-rate cut and boost borrowing costs sooner than previously estimated as the economy recovers from the nation’s deadliest earthquake in 80 years.
Five of 16 economists surveyed by Bloomberg News brought forward their predictions for an increase in the official cash rate after Governor Alan Bollard said yesterday a gradual rise over the next two years will be needed. Eight say the Reserve Bank of New Zealand will lift the benchmark by Dec. 31 after keeping it at a record-low 2.5 percent yesterday.
New Zealand’s dollar advanced yesterday to a record 83.02 U.S. cents, an appreciation that Finance Minister Bill English has said is a “headwind” for exporters. The central bank expects growth will more than triple to a 10-year high of 4.8 percent in 2012 from 1.5 percent this year as soaring commodity prices and rebuilding after the Feb. 22 Christchurch quake buoy expansion.
“The Reserve Bank is more confident about the growth outlook and more worried about upside risks to inflation,” said Darren Gibbs, chief economist at Deutsche Bank AG in Auckland. “It is clear that the Reserve Bank wished to give itself the option of moving a little earlier than December.”
Gibbs yesterday brought forward his forecast rate change to December from March. Among the remaining eight out of 16 economists in the Bloomberg survey who don’t expect an increase this year, four expect a move in January and four see a March adjustment.
There is an 80 percent chance Bollard will increase rates by a quarter of a percentage point to 2.75 percent in December, ANZ National Bank Ltd. prices for interest-rates swaps showed at 9:40 a.m. in Wellington, up from a 64 percent chance before yesterday’s rate announcement. There is a 24 percent chance of an October increase.
“As gross domestic product growth picks up, underlying inflation is expected to rise,” Bollard said in a statement yesterday. “A gradual increase in the official cash rate over the next two years will be required to offset this.”
Bollard today said he was surprised at the market reaction to his comments, which has seen the currency reach the highest since exchange rate controls were removed in 1985.
‘Doesn’t Add Up’
Markets have “over-interpreted the desirable strength of the New Zealand dollar,” Bollard said in an interview on Radio New Zealand’s Morning Report program. “If our forecast results in an increase in the dollar, that means we have less need to increase interest rates late this year or early next year. It doesn’t add up.”
The yield on the 6 percent government bond maturing April 2013 rose as much as 11 basis points to 3.32 percent yesterday. A basis point is 0.01 percentage point. The yield is 3.27 percent at 9:40 a.m. in Wellington.
The central bank projected yesterday that the three-month bank bill yield, an indicator of cash rate trends, will gain 30 basis points in the fourth quarter this year and increase another 160 points over 2012.
“The track is consistent with a picture of cash rate increases at some stage over the next year,” Bollard told reporters yesterday. “The market expectations approximately expect that the RBNZ could move at the end of the year and that’s not inconsistent with the way that we’re looking at it, but that will depend on the economic data as it comes through.”
The central bank cut the benchmark rate in March to bolster confidence after the temblor in the southern city of Christchurch killed more than 180 people, closed the central business district and slowed spending.
“While many firms and households continue to be adversely affected, it appears the negative confidence effect of the earthquake on economic activity throughout the rest of the country has been limited,” Bollard said in the quarterly monetary policy statement yesterday.
The economy will be buoyed by record-high commodity prices and a recovery in household spending and employment, the central bank said. Rebuilding of Christchurch is expected to begin in 2012 and underpin the construction industry, it said.
New Zealand’s three biggest exports are dairy, meat and wood products, with 30 percent of the nation’s gross domestic product coming from shipments abroad. Prices of commodity exports rose to a record last month, according to an ANZ National Bank Ltd. index on June 1.
Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said May 24 that it may pay its New Zealand suppliers 10 percent less for milk solids in the year ending May 31, 2012, amid a strengthening currency and signs of increasing global dairy production.
New Zealand’s annual inflation rate will peak at 5 percent in the year ending June 30, reflecting one-time government charges including an increase in sales tax that added 2 percentage points, the central bank forecasts.
New Zealand company executives raised their expectations for the nation’s inflation rate to the highest in almost three years, according to the 75 business managers surveyed for the central bank. Inflation will average 3 percent in two years, the survey showed.
“It would be of concern if the recent pick-up and relatively high level of surveyed inflation expectations persisted,” he said.
--With assistance from Daniel Petrie in Sydney. Editors: Stephanie Phang, Cherian Thomas, Ed Johnson
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