Bloomberg News

Bollard Signals Longer N.Z. Rate Pause as Inflation in Check

January 26, 2012

(Updates with retailer’s prospects in 10th paragraph.)

Jan. 26 (Bloomberg) -- New Zealand central bank Governor Alan Bollard signaled interest rates may stay at a record low for longer than he intended a month ago, citing inflation that’s “reassuringly” contained amid Europe’s debt crisis.

“Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the official cash rate on hold at 2.5 percent,” Bollard said in a statement today in Wellington. That was a change from his remarks in December, when he said it was “prudent for now” to hold rates for a ninth straight month.

New Zealand’s recovery may struggle to accelerate as Europe’s fiscal turmoil slows the economies of Australia and Asia, which buy almost two-thirds of the country’s exports. Bollard held rates rather than matching cuts in Australia and Thailand because reconstruction of earthquake-devastated Christchurch city is expected to boost growth and fan inflation.

“They have moved out the timing of the first rate hike,” Dominick Stephens, chief economist of Westpac Banking Corp.’s New Zealand unit, said from Auckland. “It’s likely to be September or possibly later.”

Last month, Bollard indicated a rate rise may happen about mid-2012. Today’s change in stance reflects less inflation pressure and a rise in the currency since December, Stephens said. New Zealand’s dollar is the best-performing Group of 10 currency the past month, rising 5.4 percent.

Stronger Currency

The New Zealand dollar remained higher after Bollard’s comments. It bought 81.65 U.S. cents at 4:04 p.m. in Wellington from 81.39 cents immediately before the statement was released.

Today’s decision was forecast by all 14 economists in a Bloomberg News survey. In a survey of economists last week, seven predicted a rate rise in or before September and seven expect no change until the fourth quarter.

“The global economy remains fragile and risks to the outlook remain,” Bollard said. “World prices for New Zealand’s export commodities have remained elevated but the recent appreciation of the New Zealand dollar is reducing exporters’ returns.”

Consumers are reluctant to spend, diminishing results at companies including Christchurch-based Kathmandu Holdings Ltd., which sells outdoor clothing and equipment. It said last month the retail environment had become increasingly difficult in both Australia and New Zealand.

‘Below Expectations’

“Our trading performance throughout the Christmas period to date has been below expectations, which is a reflection of weaker consumer spending,” Chief Executive Officer Peter Halkett said in a statement sent to the stock exchange Dec. 22.

Financial market sentiment has improved slightly since the previous rate decision, Bollard said. Still, the debt crisis has increased the cost of international funding “which will likely pressure funding costs for New Zealand banks over the coming year,” he said.

Christchurch and the surrounding Canterbury region in the South Island has been rocked by quakes since September 2010, including a Feb. 22 temblor that killed 181 people. Authorities are demolishing city buildings and repairing homes, while large- scale reconstruction is yet to begin. A further series of aftershocks has struck the city since Dec. 23.

“Repairs and reconstruction in Canterbury will provide a significant boost for an extended period, though there may be further delays resulting from the aftershocks,” Bollard said.

Slumping Prices

New Zealand consumer prices unexpectedly fell in the fourth quarter, according to a report on Jan. 19. Prices rose 1.8 percent in the year ended Dec. 31, less than the midpoint of the 1 percent to 3 percent range Bollard is required to target.

Reports this year add to the case for a slow economic recovery. Spending on debit and credit cards fell a second month in December, and job advertisements also declined from November. Business confidence declined, with a majority of firms saying fourth-quarter profits fell and fewer saying they expect first- quarter earnings to improve, the New Zealand Institute of Economic Research Inc. said in a report on Jan. 17.

“We continue to see modest growth,” Bollard said today. “Over recent months there have been signs of a limited recovery in household spending and the housing market. Reassuringly, inflation pressures have remained well contained.”

Monetary Easing

Asian central bankers have been lowering interest rates as Europe’s crisis threatens global growth. The International Monetary Fund on Jan. 24 cut its forecast for global growth and warned that the world may face a recession if the euro-region’s turmoil intensified.

The Reserve Bank of Australia will cut its benchmark interest rate a quarter point to 4 percent on Feb. 7, according to 21 of 22 economists surveyed by Bloomberg. RBA Governor Glenn Stevens lowered borrowing costs at meetings in November and December, with the rate now at 4.25 percent.

Thailand yesterday cut its one-day bond repurchase rate a quarter point. The Philippines this month lowered interest rates for the first time since July 2009. In the U.S. yesterday, Federal Reserve officials said the federal funds target rate, at zero to 0.25 percent, will likely stay low until at least late-2014.

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. Editors: Brendan Murray, Chris Bourke

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net


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