New Zealand’s central bank extended a period of record-low borrowing costs that began almost two years ago as a rising currency and sluggish domestic demand contain inflation. The local dollar advanced.
“We expect economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 percent target midpoint,” Reserve Bank Governor Graeme Wheeler said in a statement released today in Wellington, after keeping the official cash rate at 2.5 percent.
Wheeler is betting that slow economic growth and benign inflation don’t justify a rate cut because reconstruction from earthquakes and housing investment will boost domestic demand later this year. The New Zealand dollar’s 7.5 percent gain the past two years has made imports cheaper, keeping annual inflation under his 2 percent target.
“The high exchange rate is set to provide more of the necessary monetary tightening, leaving less work for interest rates,” Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. (WBC) in Auckland, said ahead of the statement. He expects no change in the cash rate until December.
New Zealand’s dollar strengthened, buying 83.41 U.S. cents at 9:03 a.m. in Wellington compared with 83.21 cents immediately before the statement.
Today’s rate decision was forecast by all 16 economists in a Bloomberg News survey. Seven predict a rate rise this year and nine see no change until 2014.
The central bank has left the benchmark borrowing cost unchanged since March 2011 to allow the economy to recover after the nation’s deadliest quake 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.
Gross domestic product increased 0.2 percent in the three months through September, according to a government report last month. Consumer prices fell in the fourth quarter from the July- September period and rose 0.9 percent in the year through December, a Jan. 18 report showed.
Wheeler’s annual inflation target is the midpoint of a 1 percent to 3 percent range.
Still, construction expanded the most in 10 years in the third quarter, boosted by rebuilding in Christchurch. Construction costs rose 10 percent in the city and the surrounding Canterbury region in the year ended Dec. 31, compared with the 3.1 percent pace across the whole country.
Fletcher Building Ltd. (FBU), the nation’s biggest supplier of construction materials, is the best performer this year on the benchmark NZX 50 stock index, gaining 12 percent amid predictions of rising earnings from earthquake-related work.
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