Bloomberg News

N.Z. Holds Rates Amid Global Slowdown, Benign Inflation

October 26, 2011

(Updates with economist’s comment in fourth paragraph.)

Oct. 27 (Bloomberg) -- New Zealand’s central bank left interest rates at a record-low as inflation slows and a European debt crisis threatens the nation’s recovery from a February earthquake.

“If global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require further cash rate increases,” Governor Alan Bollard said in a statement in Wellington after holding the official cash rate at 2.5 percent. “Given the ongoing global economic and financial risks, it remains prudent to keep the cash rate on hold for now.”

New Zealand’s currency rose on the likelihood of higher borrowing costs, which contrasts with nations such as Australia and Canada, where rates are on hold or may decline. Quake rebuilding on the South Island is likely to provide “significant impetus” for demand, Bollard said, and investors raised their bets on higher rates in March.

“For all intents and purposes, we are the only Western- world economy where the central bank is still actively talking about the prospect of rate increases,” Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington, said before the statement. “People started to build in the expectations that there was a very real risk that the Reserve Bank would drop its suggestion that it will need to raise rates.”

New Zealand’s dollar strengthened to 80.10 U.S. cents as of 9:54 a.m. in Wellington from 79.43 cents before the announcement.

Rate Outlook

Today’s decision was forecast by all 18 economists surveyed by Bloomberg News. Four expected a rate rise at the next review on Dec. 8, six saw the next increase in the first quarter and eight predicted no change until the second quarter.

The Bank of Canada yesterday cut its growth outlook through mid-2012, reducing chances of rate increases next year. Twelve of 20 economists surveyed by Bloomberg expect the Reserve Bank of Australia’s next move at a Nov. 1 meeting will be to lower its overnight cash rate target.

Expectations of New Zealand rate rises have dimmed as attempts to solve a European sovereign debt crisis drag on. European Union leaders are seeking an agreement to provide debt relief to Greece to avoid contagion spreading to Italy and Spain, while politicians from Australia to North America are prodding the euro area to get ahead of the crisis before it infects the world economy.

‘Real Risk’

“There is a real risk that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand’s commodity export prices,” Bollard said. “The difficult market conditions could also result in increased bank funding costs over the coming year.”

Consumer prices rose 0.4 percent in the three months ended Sept. 30, the slowest pace in five quarters, and less than the 0.7 percent Bollard forecast last month. Annual inflation was 4.6 percent, while excluding the one-time effect of a higher sales tax, it was 2.5 percent.

The third-quarter figures suggest that underlying inflation “is settling near 2 percent,” Bollard said today. The central bank is required to keep annual price movements within a 1 percent to 3 percent target band.

Emergency Cut

Bollard reduced the benchmark rate by half a percentage point in March after an earthquake struck Christchurch, the second-biggest city, killed 181 people, closed the central business district and slowed spending. In July, he said he saw little need for that cut to remain in place much longer, provided the economy continues to recover and global financial risks recede.

“Domestic activity has continued to expand at only a modest pace despite relatively strong commodity prices,” Bollard said. “Further ahead, earthquake repairs and reconstruction are still expected to provide significant impetus for demand.”

The Treasury Department on Oct. 25 lowered its forecast for gross domestic product growth to 3.4 percent from 4 percent in the year ending March 31, 2013, 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 as he released the forecasts.

Weaker Confidence

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. Business confidence fell to a seven-month low this month, according to a survey published by ANZ National Bank Ltd. yesterday.

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 ($561 million), the central bank estimated.

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, Garfield Reynolds

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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