Bloomberg News

Bollard Signals Earlier-Than-Forecast Rate Rise in New Zealand

July 27, 2011

July 28 (Bloomberg) -- New Zealand’s central bank signaled it will raise its benchmark interest rate sooner than most economists predicted to contain prices as the nation’s economy recovers from the deadliest earthquake in 80 years.

“Provided current global financial risks recede and the economy continues to recover, the bank sees little need for the March ‘insurance’ cut to remain in place much longer,” Governor Alan Bollard said in a statement today in Wellington after leaving the benchmark rate at record-low 2.5 percent.

Economists and traders now expect Bollard will raise the official cash rate at the next review Sept. 15 by half a percentage-point, after a cut of the same size in March that helped revive confidence after the Feb. 22 quake in the southern city of Christchurch. Bollard said the record-high New Zealand dollar gives him scope to delay further rate rises.

“There is no point in removing the insurance cut in multiple steps,” said Khoon Goh, head of market economics at ANZ National Bank Ltd. in Wellington, who expects a half-point increase in September. “Beyond that, the RBNZ will pause and assess the landscape. Global uncertainties remain.”

New Zealand’s dollar rose to 87.22 U.S. cents at 11:06 a.m. in Wellington from 86.98 cents immediately ahead of the release. The currency bought 87.66 cents yesterday, the highest since exchange controls were removed in 1985.

“The current very high value of the New Zealand dollar is acting as a drag on the economy,” Bollard said today. “If this persists, it is likely to reduce the need for further cash rate increases in the short term.”

Rate Forecasts

Economists at ASB Bank Ltd., Royal Bank of Scotland and First NZ Capital also revised their rate forecasts after today’s statement, expecting a half-point rise in September rather than no change until December.

Before Bollard’s statement today, five economists surveyed by Bloomberg News forecast a rate rise in either September or October, six saw a move in December and four predicted no change until 2012.

Traders are certain of at least a quarter-point rate increase in September with a 48 percent chance of a half-point increase, according to swaps prices from Westpac Banking Corp.

New Zealand’s economy has grown more strongly than expected, stoked by high terms of trade, Bollard said today, referring to a measure of income from exports. Still, fragility in global financial markets highlights the “downside risk” to the nation’s main trading partners, he said.

Inflation Target

In today’s statement, Bollard said annual consumer inflation remains above the central bank’s 1 percent to 3 percent target range. Much of the current gains in inflation have been driven by an October 2010 increase in the sales tax rate, “and will therefore be temporary,” he said. Wage and price setters should focus on underlying inflation, which is currently estimated to be below 2.5 percent, he said.

Bollard’s signal that there aren’t rising inflation pressures in the economy is “somewhat disconcerting,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington.

“He suggests that there aren’t any inflationary pressures in the economy over and above that requirement to remove the emergency cut, and there will be a lot less need to raise interest rates to cope with those inflationary pressures,” he said. “I’d beg to differ.”

Thirty-three percent of companies surveyed by ANZ National this month expect to raise prices in the next three months, up from 30 percent in June. In a year, annual inflation will be 3.1 percent, according to the survey published yesterday.

Lower Exports

Exports dropped to a five-month low in June amid falling commodity prices, a report this week showed. Milk powder prices were at an eight-month low at a July 19 auction, according to Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter.

“There are combinations such as a continually rising dollar and dropping commodity prices which would be pretty negative for New Zealand,” Finance Minister Bill English said in an interview with Radio New Zealand yesterday. Investors are seeing the economy as a “safe haven” because of its growth prospects, he said.

For news and related information: Stories on interest rates NZOCR <Index> CN <GO> Reports on Alan Bollard NSE ALAN BOLLARD ZEALAND <GO> Stories on New Zealand economy NZNTGDPC <Index> CN <GO> Top New Zealand stories TOP AU <GO>

--With assistance from Daniel Petrie in Sydney and Chris Bourke in Wellington. Editors: Brendan Murray, Michael Heath

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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