Jan. 27 (Bloomberg) -- New Zealand’s economy may expand slower than forecast in 2012 due to earthquake reconstruction delays, central bank Governor Alan Bollard said, reinforcing investors’ views that interest rates will be on hold until 2013.
The increase in gross domestic product this year will be less than the 3 percent forecast in December, Bollard told reporters after a speech in Christchurch today. He said fallout in the Asia-Pacific region from Europe’s sovereign-debt crisis would also curb growth.
“The market thinks rates are going to be unchanged right through this year,” Bollard said. “We’re not uncomfortable with that. As we see the numbers at the minute, it seems to be a reasonable deduction to take from that.”
New Zealand’s currency declined as investors reduced bets on an increase in borrowing costs, which Bollard yesterday left at a record-low 2.5 percent for a 10th month. The central bank will need to keep monitoring quake reconstruction “to judge whether the level of the cash rate continues to be appropriate,” Bollard said in the speech.
The local dollar fell to 82.02 U.S. cents at 3:15 p.m. in Wellington from 82.19 cents in late New York trading yesterday. Investors see no chance the central bank will raise rates in the next year, according to a Credit Suisse Group AG index based on swaps trading.
The central bank “pushed out our assumption of the rebuild by a few months,” Bollard told the business audience in Christchurch today. The Reserve Bank expects a “gradual lift in activity over 2012, consistent with demolition and repairs to housing and infrastructure getting under way, with reconstruction getting under way in earnest in 2013,” he said.
Bollard had previously said he expected rebuilding to pick up in the second half of 2012, and the delay adds to the case for slower-than-projected economic growth and an extended rate pause.
Bollard’s speech covered two main forces affecting the outlook for the nation’s economy -- seismic shocks of the past 16 months and the euro area’s fiscal troubles.
“Europe accounts for a significant share of global economic activity, and is an important trading partner for many Asia-Pacific economies,” Bollard said. “Spillovers from a recession in Europe could spark a slowdown in Asia, pushing down commodity prices and having a marked impact on Australia and New Zealand.”
Exports make up 30 percent of the New Zealand economy. About two-thirds of the nation’s overseas sales go to Asia and Australia.
Rocked by Quakes
Christchurch, the nation’s second-biggest city, has been rocked by quakes since September 2010, including a temblor in February that killed 181 people and closed the central business district. Most recently, an aftershock on Dec. 23 forced malls to close and delayed demolition work.
“We took account of the latest aftershocks” in yesterday’s rate decision, Bollard said. The governor changed the wording in his post-meeting statement yesterday, leading economists to suggest he is likely to leave borrowing costs lower for longer than he intended a month ago.
The outlook for rebuilding “remains subject to a high degree of uncertainty,” Bollard said today. “Reconstruction is projected to eventually provide a boost to demand. Spare capacity and labor will be absorbed rapidly and inflation pressures will pick up from current low levels.”
Before last month’s aftershocks, the central bank assumed that about NZ$20 billion of damaged property would be rebuilt, equivalent to 10 percent of GDP, Bollard said. The sum could rise as material and construction costs increase, he said.
The central bank estimates the total cost of claims from the earthquakes may be as much as NZ$30 billion which includes temporary accommodation, business interruption and non-build related costs, he said.
Bollard in December forecast annual economic growth will improve to 3 percent this year and 3.3 percent in 2013. Excluding the contribution from Christchurch reconstruction, growth would be 2.2 percent in 2012, the central bank said.
--Editors: Brendan Murray, Chris Bourke
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