Bloomberg News

Bollard’s ‘Downbeat’ View May Extend New Zealand Rate Pause

September 15, 2011

(Updates with confidence data in third, fifth paragraphs.)

Sept. 16 (Bloomberg) -- New Zealand’s central bank may delay its next interest-rate increase until next year, economists said after Governor Alan Bollard signaled growing global risks are a threat to the nation’s export-driven economy.

Seven of 10 economists surveyed by Bloomberg News yesterday predicted Bollard will keep the official cash rate at a record- low of 2.5 percent until at least January. Last week, 13 of 15 expected higher borrowing costs by December.

New Zealand’s currency is set to fall against the yen this week after Bollard left rates unchanged and investors raised bets he’ll pause through the rest of this year. A private report today showed consumer confidence slid this month, signaling concern a faltering global economy will outweigh the short-term spending boost from the Rugby World Cup.

“Not only did the Reserve Bank stay on hold, it produced a more downbeat statement about the state of the world,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “We find it hard to fault in these uncertain times.”

The ANZ National Bank Ltd.-Roy Morgan confidence index declined to 112.6 from 113.3 in August, the Auckland-based lender said in an e-mailed report today. The gauge has gained from a two-year low of 101.4 reached in March and April.

The local currency bought 82.31 U.S. cents at 2:47 p.m. in Wellington from 82.38 late yesterday in New York. Against the yen, it traded at 63.25, set for a 0.9 percent decline this week.

Rate Outlook

Swaps markets indicated a 68 percent chance Bollard will hold the cash rate at 2.5 percent for the rest of the year, according to data today from Westpac Banking Corp. As recently as Aug. 24, traders were certain he would lift the benchmark to at least 2.75 percent.

Toplis forecast the cash rate will remain at 2.5 percent until March, when it may rise a quarter of a percentage point. Before yesterday, he expected a quarter-point increase in October.

Bollard yesterday reiterated that eventual increases in borrowing costs will hinge on a decline in global financial risks and a sustained domestic recovery after an earthquake demolished businesses, roads and houses in the South Island city of Christchurch in February.

“If recent global developments have only a mild impact on the New Zealand economy, it is likely that the cash rate will need to increase,” he said.

The six-week-long rugby tournament began last week, drawing an estimated 95,000 foreign visitors.

Market Turmoil

Investors began reducing bets on a rate rise last month after Europe’s fiscal crisis deepened and Standard & Poor’s cut the U.S. government’s credit rating. The MSCI World Index of equities has slumped about 13 percent since Bollard’s July 28 rate-setting meeting.

“Sovereign debt concerns in Europe and the weakened global outlook have caused international bank-funding markets to tighten,” Bollard said yesterday. “If conditions do not improve, New Zealand bank funding costs will increase.”

The New Zealand dollar’s 13 percent gain the past six months, making it the best performing among 16 counterparts tracked by Bloomberg, is also curbing exports, which make up 30 percent of gross domestic product, he said.

“The exchange rate is significantly penalizing some activity in the traded sector, hurting some New Zealand firms and that’s a medium-term effect not a short-term effect,” he told reporters in Wellington after yesterday’s meeting.

Stronger Kiwi

The currency has strengthened because New Zealand’s economy has outperformed others in the developed world, Bollard said.

New Zealand’s economic recovery may be slower next year than government forecasts as a high currency and weaker growth in the U.S. and Europe curb exports, Finance Minister Bill English said in a Sept. 14 interview.

For households, “there’s a bit of a relief factor there with interest rates looking like they’re going to be lower for longer,” English said in Wellington.

New Zealand’s three biggest exports are dairy, meat and wood products. Prices of commodity exports fell for a third month in August, according to an ANZ National Bank Ltd. index on Sept. 1.

Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said Sept. 2 that it may pay its New Zealand suppliers 10 percent less for milk in the year ending May 31, maintaining an earlier forecast amid a strengthening currency and signs of increasing global dairy production.

Growth Outlook

The central bank yesterday lowered its forecast for economic growth in the year ending March 31 to 3.6 percent, from 4.4 percent projected in its June policy statement. Growth the following year will be 2.6 percent, less than the 3.6 percent previous estimate.

“The Reserve Bank seems particularly nervous about the possibility of global banking sector strains,” said Philip Borkin, economist at Goldman Sachs & Partners New Zealand Ltd. in Auckland, who expects no rate change until March. “This is where New Zealand is most vulnerable. It is easy to envisage a scenario against the backdrop of higher bank-funding costs where rate hikes were delayed further.”

--With assistance from Daniel Petrie in Sydney. Editors: Brendan Murray, Malcolm Scott

To contact the reporter on this story: Tracy Withers in Wellington at

To contact the editor responsible for this story: Stephanie Phang at

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