Bloomberg News

Bollard May Keep Record-Low N.Z. Rate to Wait Out Turmoil

September 13, 2011

(Updates currency in eighth paragraph.)

Sept. 14 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably hold interest rates at a record low as global market turmoil delays the need to reverse a cut made after an earthquake wrecked the nation’s second-biggest city.

All 15 economists surveyed by Bloomberg News said the Reserve Bank of New Zealand will leave the official cash rate at 2.5 percent in a 9 a.m. decision tomorrow in Wellington. Thirteen economists forecast the rate will rise before Dec. 31.

Investors in early August slashed bets on a rate rise after Europe’s fiscal crisis deepened and Standard & Poor’s cut the U.S. credit rating, which depressed equities worldwide and derailed estimates that Bollard would raise borrowing costs as early as September. In July, he said rate increases hinged on an economic recovery and a decline in global financial risks.

“The latter has clearly not occurred,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. “Global financial risks have become much more acute over the past month or so.”

Investors are betting on an 8 percent chance that Bollard would increase borrowing costs, according to a Credit Suisse Group AG index based on swaps trading late yesterday in Wellington. That makes him the only developed-world central bank governor markets judge may contemplate raising interest rates even as share markets plunge on concern Greece will default.

The probability of a rate increase has declined from a 100 percent chance on Aug. 4, the day before S&P downgraded the U.S. long-term sovereign rating to AA+.

Emergency Cut

Bollard said July 28 there was little need to retain the half-point cut he made in March to buoy the economy after the temblor in the South Island city of Christchurch devastated the city center and killed more than 180 people. He also said then a strong New Zealand dollar would reduce the need for rate increases in the short term.

Since Bollard’s last rates meeting, the local currency ended a five-month advance and has dropped about 5 percent against the U.S. dollar. The so-called kiwi bought 82.26 U.S. cents as of 9:45 a.m. in Wellington.

The Organization for Economic Cooperation and Development last week slashed its growth forecasts for the U.S. and Japan, which are New Zealand’s third- and fourth-biggest trading partners.

A slowdown in the economies of key trading partners may curb demand for New Zealand exports, which make up 30 percent of gross domestic product, the Treasury Department said in a report on Sept. 5.

‘Ongoing Worries’

“There are ongoing worries that a number of countries starting with Greece may be forced to default on their government debt,” Finance Minister Bill English said in response to questions in parliament yesterday. “Any economic weakness is not good news for New Zealand.”

The renewed global slump is giving Bollard scope to delay a rate increase, economists said. Commodity prices fell a third month in August, according to an ANZ National Bank index.

Still, economists don’t see Bollard waiting much longer to remove the emergency cut, as underlying inflation is near the top of his 1 percent to 3 percent target range. New Zealand consumer prices increased 5.3 percent in the year through June, the most since 1990, after emissions trading levies and an increase in sales tax added an estimated 2.5 percentage points.

Rugby Tournament

New Zealand’s economy will get a boost from tourist spending during the six-week-long Rugby World Cup that started Sept. 9, and as rebuilding in Christchurch gets under way next year, said Bank of New Zealand Ltd. staff including Craig Ebert, the firm’s senior economist, in Wellington.

The central bank in June forecast annual growth of 2.9 percent this year and 4.7 percent in 2012. It publishes fresh forecasts tomorrow.

Consumer confidence rose to a seven-month high in August, according to an ANZ National Bank Ltd. report. House prices in August rose for the second time in three months, the Real Estate Institute said yesterday. Second-quarter retail sales increased by more than economists predicted.

Auckland-based Briscoe Group Ltd., which operates houseware and sporting goods stores, is “cautiously optimistic” about business in the six months ending Jan. 31, Chief Executive Officer Rod Duke said in a statement Sept. 9.

“We believe we will see further uncertainty in consumer confidence, which will result in continued difficult trading conditions for retailers,” he said.

Economic growth will accelerate even with second-quarter “clouds” over the economy including weaker home building and slower manufacturing, said Ebert, who predicts a rate rise in December. Bollard “has the central task of weighing a wobbly world with a domestic economy proving itself not requiring emergency policy settings,” Ebert said.

--Editors: Brendan Murray, Garfield Reynolds

To contact the reporters on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

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


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