NZ keeps rate at 2.5%, may tighten in 2H2010

WELLINGTON: New Zealand’s central bank said it will wait until the second half of next year before raising interest rates because the economy needs further stimulus as it recovers from a recession.

“We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the cash rate at the current level until the second half of 2010,” Reserve Bank governor Alan Bollard said in a statement in Wellington on Oct 29 after leaving the official cash rate at a record-low of 2.5%.

Bollard is keeping borrowing costs steady as his counterparts in Australia and Norway increase their benchmark rates amid accelerating inflation. The nation’s currency fell as traders pared bets the central bank would increase the cash rate as early as the first quarter.

“They had to acknowledge that the official cash rate is unlikely to stay at these levels through the next year,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd in Sydney. Still “they don’t want to threaten the recovery, and they don’t want to fuel the currency”.

New Zealand’s dollar fell to 71.86 US cents at 1.50pm in Wellington from 72.81 cents immediately before the decision. Traders expect 212 basis points of rate increases over the next year, down from 232 points on Oct 28, according to a Credit Suisse index based on swaps trading. A basis point is 0.01 percentage point.

All 11 economists surveyed by Bloomberg News expected the Oct 29 decision. Three forecast a rate increase in the first quarter of next year and nine, including Ong, expect higher borrowing costs by June 30.

New Zealand’s currency has surged 25% against the US dollar the past six months, the best performing major currency tracked by Bloomberg, as rising house prices and a pickup in consumer and business confidence fanned expectations Bollard may raise borrowing costs as early as January.

Instead, his outlook on rates has changed only slightly since Sept 10 when he said he expected to keep the cash rate “at or below the current level through until the latter part of 2010”.

The economy grew for the first time in six quarters in the three months to June, buoyed by low interest rates and a fiscal stimulus that included tax cuts and extra government spending.

“The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support to the economy,” said Bollard. “We think such support remains appropriate.”

Finance Minister Bill English has signalled he will cut government spending. Removing some fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do, Bollard said.

Central bankers around the world are now assessing when to start raising interest rates as the global economy recovers.

Reserve Bank of Australia governor Glenn Stevens raised his benchmark rate on Oct 6 by a quarter point to 3.25%, the first G-20 central banker to move since the height of the financial crisis.

Norway’s central bank on Oct 28 raised its overnight deposit rate to 1.5%. Bank of Korea governor Lee Seong Tae last month signalled he may increase borrowing costs in the future to stem rising property prices.

While the economies of New Zealand’s main trading partners are rebounding, there remains “significant vulnerabilities and challenges to be worked through”, Bollard said. – Bloomberg LP