(Updates with currency in fourth, sixth paragraphs; Bollard comments on Wellington quake risk in seventh paragraph.)
Oct. 18 (Bloomberg) -- New Zealand’s reconstruction of the earthquake-devastated city of Christchurch will boost growth and inflation pressures, Reserve Bank Governor Alan Bollard said, signaling interest rates will probably need to increase.
Reconstruction from quakes in the nation’s second-largest city since September 2010, including a Feb. 22 temblor that killed 181 people, should provide “significant stimulus” in the medium term, Bollard said today in prepared remarks for a Wellington speech.
Bollard is among Asia-Pacific central bankers who have held or lowered borrowing costs this year to ride out renewed threats to the global economy from Europe’s sovereign-debt crisis. The rebuild is likely to cost about NZ$20 billion ($15.9 billion), equivalent to 10 percent of gross domestic product, he said.
The high concentration of work in one region “will boost medium-term activity and inflationary pressures for an extended period,” Bollard said. “It would therefore be inappropriate, all else equal, for monetary policy to be stimulatory during the reconstruction period.”
The New Zealand dollar strengthened as traders bet Bollard will consider unwinding a 50 basis-point emergency cut made in March to help cushion the economy from the quake’s fallout. The so-called kiwi traded at 79.25 U.S. cents at 11:11 a.m. in Wellington from 79.11 cents before the comments.
The Reserve Bank kept the official cash rate unchanged at a record-low 2.5 percent last month, citing risks of a global slowdown, and 12 of 17 economists surveyed by Bloomberg News expect no change in borrowing costs until at least January.
The central bank will start to withdraw monetary support as economic conditions in the region improve, Bollard said today. It will work “towards ensuring that the degree of economic stimulus provided is appropriate for achieving our medium-term policy aims,” he said.
Bollard’s speech, on the economic impact of seismic risk, also focused on the threat to the capital, Wellington. The experience of Christchurch suggests that a quake in Wellington would hurt the tourism and education industries most, while office-based services could relocate as necessary once electricity and telecommunications could be resumed, he said.
“Wellington might be expected to be more resilient in that many of the buildings have been built or altered with earthquakes in mind,” Bollard said. “These standards are now being reviewed in the light of Christchurch, and will likely be increased, requiring significant further upgrading in Wellington (and possibly driving a small commercial building boom as happened in the 1980s). The challenge here will be to avoid a costly regulatory overreaction to a one-off event.”
He said a concern is that earthquake insurance coverage could become much more limited, more expensive, and more restrictive in Wellington, following the Christchurch damage.
“Already we are seeing big increases in reinsurance premiums, tighter covenants, high excesses, and a move from full replacement to indemnity policies,” Bollard told a Rotary Club of Wellington and Victoria University of Wellington forum.
--With assistance from Daniel Petrie in Sydney. Editors: Brendan Murray, Garfield Reynolds
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