Bloomberg News

Bollard May Keep Record-Low N.Z. Rate on Europe Debt Crisis

October 25, 2011

Oct. 26 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably hold interest rates at a record low tomorrow as inflation slows and a European debt crisis threatens the nation’s recovery from a February earthquake.

All 18 economists surveyed by Bloomberg News said the Reserve Bank will leave the official cash rate at 2.5 percent in a 9 a.m. decision in Wellington. Fourteen forecast the rate will remain unchanged until next year and four predict a rate rise in December.

Investors are reducing bets Bollard will lift rates before the second quarter of 2012 amid Europe’s fiscal turmoil and after domestic inflation last quarter rose at the slowest pace in more than a year. European Union leaders hold a summit today seeking an agreement to provide debt relief to Greece to avoid contagion spreading to Italy and Spain.

“This is not the backdrop to begin a tightening cycle,” said Philip Borkin, an economist at Goldman Sachs & Partners New Zealand Ltd. in Auckland. “The Reserve Bank will want greater clarity that downside risks are becoming less likely. This could take some time.”

Adding to Bollard’s scope to pause is a rising local currency that’s easing inflation pressure from imports. New Zealand’s dollar is up 5.7 percent so far this month against its U.S. counterpart, the third-biggest gainer among the Group of 10 currencies tracked by Bloomberg, after an 8.2 percent decline in the third quarter.

Rate Bets

There is zero chance of a rate rise tomorrow and a 28 percent likelihood of a quarter-point increase in March, down from 36 percent on Oct. 21, according to swaps prices from Westpac Banking Corp. There is a 72 percent chance of a higher rate by June.

Exports account for almost a third of New Zealand’s gross domestic product. Bollard said Sept. 15 global financial and economic risks had increased and the outlook for the nation’s trading partners was weaker.

The central bank cut borrowing costs in March to buoy the economy after the temblor in the South Island city of Christchurch devastated the city center and killed 181 people.

“Since that time however, monetary policy has had to account for a number of significant developments,” Bollard said in an Oct. 18 speech in Wellington. “These include the continuing sovereign-debt concerns in Europe and related developments in financial markets.”

Rebuilding Costs

Bollard has said he expects quake reconstruction will cost at least NZ$20 billion ($16 billion) and will boost growth and inflation pressure over the medium term.

“It would therefore be inappropriate, all else equal, for monetary policy to be stimulatory during the reconstruction period,” he said in the speech.

Signs that Bollard may raise borrowing costs next year contrast with other Asian central bankers who may be planning to lower rates.

Indonesia this month cut its reference rate while traders have boosted bets Reserve Bank of Australia Governor Glenn Stevens will lower the overnight cash rate target from 4.75 percent, where he has held it for the past 11 months.

Easing pressure on Bollard, consumer prices rose by less than he and economists projected in the third quarter, according to a government report yesterday. Prices rose 0.4 percent from the second quarter, less than the 0.7 percent median forecast in a Bloomberg News survey of 16 economists. The central bank also expected 0.7 percent.

Underlying Inflation

Removing the effects of a sales-tax increase, annual inflation accelerated 2.5 percent last quarter -- within the central bank’s target range of 1 percent to 3 percent.

The Treasury Department yesterday lowered its forecast for GDP growth in the year ending March 31, 2013, to 3.4 percent from 4 percent, citing a weaker global economic outlook that may curb exports and a delay in starting to rebuild Christchurch.

“There are still plenty of headwinds that will keep growth moderate,” Finance Minister Bill English told reporters yesterday.

One of those constraints is net immigration, which slumped to a 10-year low last month, Statistics New Zealand said Oct. 21. Another drag on growth was a fourth straight monthly fall in commodity prices in September, according to an ANZ National Bank Ltd. index.

Fletcher Building Ltd., the nation’s biggest construction company and seller of timber and cement for building, expects a 10 percent drop in first-half profit as demand for new homes remains sluggish.

“In New Zealand, no material improvement in trading conditions is expected in the first half and the timing of a sustained and meaningful recovery beyond that is uncertain,” the Auckland-based company said on Oct. 12.

Still, New Zealand’s economy has been boosted by the Rugby World Cup, which ended with the host team’s victory on Oct. 23. About 95,000 foreign fans who attended the seven-week tournament were likely to spend about NZ$700 million, the central bank estimated.

For news and related information: New Zealand interest rates: NZOCR <Index> HP <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>

--Editors: Brendan Murray, Shamim Adam

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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