Bloomberg News

Bollard Seen Holding N.Z. Rate as Odds for Cuts Gain on EU

June 11, 2012

New Zealand is forecast to keep interest rates at a record low for longer than it did during the global financial crisis as Europe’s debt turmoil and slower export growth increase the odds of policy easing.

Reserve Bank of New Zealand Governor Alan Bollard will leave the official cash rate at 2.5 percent for a 10th straight meeting on June 14, according to all 16 economists in a Bloomberg News survey. A shadow board set up by the New Zealand Institute of Economic Research Inc. said the central bank should hold rates, while saying the panel was “now more inclined” to consider a rate cut as appropriate.

Investors are pricing in a 75 percent chance of lower borrowing costs at the September meeting on concern a June 17 Greek election could disrupt financial markets and derail the global economy. While China and Australia cut rates this month, economists said New Zealand may hold fire for now in case Europe’s turmoil escalates, slowing exports that the Pacific nation relies on for about 30 percent of gross domestic product.

“The best strategy for the RBNZ will be to leave the cash rate on hold, thereby leaving it the ability to respond to a meltdown in Europe should it occur,” said Dominick Stephens, Auckland-based New Zealand chief economist for Westpac Banking Corp. (WBC)

The shadow board, a group of academics, economists and business executives, sees a lower policy rate as more acceptable than it did in April, according to an e-mailed statement released today. Seven of its nine members said Bollard should leave the benchmark rate unchanged, while two prefer a cut.

Longer Pause

The board is a pilot run by the Wellington-based institute to encourage debate on each rate decision. The participants indicate where they think rates should be, not what they expect will happen, the institute said.

Bollard, a former director of the NZIER, has kept the cash rate unchanged since March last year. Keeping the benchmark at 2.5 percent this week would mark a longer pause at that level than the span from April 2009 to June 2010.

The chance of a quarter-point cut on June 14 fell to 22 percent at 11:30 a.m. in Wellington from 42 percent a week ago, according to interest-rate swaps data compiled by Bloomberg. The odds have eased as the New Zealand dollar declined and reports showed a lift in house sales and dairy prices.

The currency has dropped more than 5 percent the past three months after Bollard said its first-quarter gains were hurting exports and that if sustained, they may cause the central bank to reassess its policy outlook.

House Sales

May house sales rose 24 percent from a year earlier, according to Real Estate Institute Inc. figures published today. Whole-milk powder prices rose at Fonterra Cooperative Group Ltd.’s auction on June 5, ending a seven-month decline.

Bollard will probably join central bankers in Indonesia, Thailand and the Philippines in refraining from rate cuts ahead of the Greek election, according to Bloomberg surveys of economists.

“Should the global situation take a turn for the worse, the RBNZ stands ready to act,” said Robin Clements, chief New Zealand economist at UBS AG in Christchurch. “It is far better to keep the powder dry just in case the 250 basis points available are needed.”

Reserve Bank of Australia Governor Glenn Stevens reduced the overnight cash rate target by a quarter point on June 5, citing the outlook for Europe and prospects of slower growth in China, Australia’s biggest trading partner.

Australian Growth

Still, investor bets of further cuts were reversed by subsequent reports showing the Australian economy grew 1.3 percent in the first quarter from a year earlier and it unexpectedly added 38,900 jobs in May.

New Zealand’s economy is giving mixed signals, with export volumes, retail sales and home construction falling in the first three months of the year.

Bollard’s March forecast that first-quarter growth would be 0.6 percent is likely to be optimistic, according to Clements and economists such as Darren Gibbs, chief New Zealand economist at Deutsche Bank AG.

The central bank will publish fresh forecasts in a monetary policy statement also due June 14, including a weaker near-term growth outlook amid faltering household spending, Auckland-based Gibbs said.

“Continued global unrest seems bound to encourage a continuation of cautious behavior across the broader household and business sector,” he said in an e-mailed report. Government plans to curb spending to achieve a budget surplus by 2014-15 will also slow growth, he said.

Christchurch Rebuild

The central bank may forecast faster growth in 2013 and 2014 as a NZ$30 billion ($23 billion) rebuild of the South Island city of Christchurch accelerates. The city has been struck by several damaging earthquakes, including a temblor in February 2011 that killed 185 people. Parts of the central business district remain closed 16 months later.

Bollard in March signaled that quake reconstruction, and the pressure that it is forecast to put on inflation, will require the central bank to raise interest rates eventually.

All 16 economists surveyed by Bloomberg expect the next move will be a rate increase, with two forecasting a rise in December.

Still, Gibbs said a rate cut probably will stay in Bollard’s arsenal.

“The RBNZ will project a flat track for the cash rate through mid-next year,” he said. “We would be surprised if the commentary accompanying the forecasts did not at least open the door to a modest policy easing over coming months should the economy seem likely to continue to disappoint.”

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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