Bloomberg News

N.Z. Extends Cash-Rate Pause, Sees Stronger Demand Next Year

December 05, 2012

New Zealand’s central bank extended a period of record-low borrowing costs that began in March last year, sending the local currency to a four-week high on expectations for faster growth over the next two years.

“The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year,” Reserve Bank Governor Graeme Wheeler said in a statement released today in Wellington, after keeping the official cash rate at 2.5 percent. “This is expected to cause inflation to rise gradually toward the 2 percent target midpoint.”

Wheeler is betting that rising unemployment and falling consumer spending don’t justify a rate cut because they will reverse, while earthquake-related construction and housing investment will boost growth next year. He indicated he may need to hold borrowing costs unchanged through 2013 even as some economists forecast that rising inflation may prompt him to raise rates as early as the first half next year.

“Domestic conditions will be dictating the timing of the first cash rate increase and the construction boom under way is set to provide upside pressure to inflation,” Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore, said in an e-mailed note. She expects a rate rise in June.

Kiwi’s Strength

New Zealand’s dollar gained, buying 82.92 U.S. cents at 11:55 a.m. in Wellington compared with 82.54 cents immediately before the statement. The so-called kiwi reached its highest since Nov. 7 and has advanced about 6 percent against the U.S. dollar in the past 12 months, making it the strongest performer among the Group of 10 currencies tracked by Bloomberg.

Two-year swap yields rose to 2.67 percent from 2.59 percent late yesterday.

The currency’s gains reflect New Zealand’s better economic performance relative to the U.S. and the euro area as well as a favorable terms-of-trade position, the RBNZ said in its monetary policy statement also released today. The kiwi will remain elevated, it said.

“The high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demand for imports,” Wheeler said.

Also curbing an expansion, the government is cutting expenditures to achieve a budget surplus while households and companies remain reluctant to spend, he said. The global outlook remains soft although less threatening than earlier in the year, he said.

Inflation Pressure

“The bank is closely monitoring indicators for any sign of further moderation and is mindful of recent downside surprises to employment and inflation outturns,” Wheeler said. “With the reconstruction-driven pick up in investment now clearly under way, the bank will also continue to watch for a greater degree of inflation pressure than is assumed. On balance, it remains appropriate for the cash rate to be held at 2.5 percent.”

Today’s rate decision was forecast by all 16 economists in a Bloomberg News survey. Three predict a rate rise in the first quarter, 10 see an increase in the July-September period and three see no change until 2014.

The central bank today forecast the three-month bank bill yield will be 2.7 percent in the fourth quarter next year from an estimated 2.6 percent in the current quarter. The forecasts are seen as a guide to the direction of the cash rate.

Extended Pause

“Our projections don’t show an increase until 2014,” Wheeler told reporters after releasing the statement. “The outlook we have is for the cash rate to remain stable for quite some period.”

Unemployment rose to a 13-year high of 7.3 percent and retail spending fell in the third quarter, adding to the case for weaker economic growth in the second half of the year. Gross domestic product will expand 0.6 percent in the six months through December, the RBNZ said. That’s down from a 1.1 percent pace predicted in September.

The jobless measure may have overstated the weakness in the labor market, the RBNZ said. Construction expanded the most in 10 years in the third quarter, boosted by rebuilding in the South Island city of Christchurch which was devastated by earthquakes in 2010-11.

Annual growth will accelerate to 3.1 percent next year, the RBNZ forecast. In 2014, growth will be 2.8 percent, faster than the 1.9 percent pace previously forecast, it said.

2% Target

Sluggish domestic demand and the rising currency slowed annual inflation to 0.8 percent in the year through September, beneath the central bank’s 1 percent to 3 percent target range. Wheeler, who took over from Alan Bollard in late September, signed an agreement with Finance Minister Bill English in which he undertook to keep inflation near the 2 percent midpoint of the target range.

Inflation will accelerate to 1.6 percent by the end of 2013 and 1.8 percent a year later, the RBNZ forecast today. Price pressures are emerging in the economy, mostly related to the housing market and construction, it said.

The central bank has left the cash rate unchanged since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years. The February 2011 temblor struck Christchurch, New Zealand’s third-largest city, and the surrounding Canterbury province, killing 185 people and closing the central city.

The cost of reconstruction in Canterbury is now estimated at NZ$30 billion ($25 billion) the central bank said.

Fletcher Building Ltd. (FBU), the nation’s biggest construction company and supplier of cement and wallboard, last month forecast full-year earnings will rise as much as 22 percent, buoyed by Christchurch rebuilding and home construction in Auckland, the nation’s largest city.

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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