New Zealand Central Bank May Wait Until June to Raise Rate, Economists Say

New Zealand’s central bank will wait until June to raise interest rates as falling consumer spending and house sales make an increase tomorrow unlikely, according to economists.

The Reserve Bank of New Zealand will keep the official cash rate unchanged at 2.5 percent in its decision at 9 a.m. tomorrow in Wellington, according to all 15 economists surveyed by Bloomberg News. Ten analysts forecast a rate rise in June and five are tipping the third quarter.

Governor Alan Bollard said on March 11 he expected to raise borrowing costs around the middle of the year as economic growth accelerates and inflation is pushed toward the top of the range he targets. The central bank has kept the cash rate at a record low since April last year as the nation recovers from its worst recession in three decades.

“The days of a 2.5 percent cash rate are numbered,” said Michael Gordon, a markets economist at Westpac Banking Corp. in Wellington. “Returning rates to more normal levels is the right thing to do, and with the recovery on track there’s no need for additional delay.”

There is a 2 percent chance of a move tomorrow and 60 percent for June, according to a Credit Suisse index based on swaps trading.

‘Patchy’ Recovery

Recent reports have pointed to weaker-than-expected domestic demand, prompting investors to reduce bets of an April rate rise. Retail sales fell for the second time in three months in February, according to government figures on April 14. First- quarter house sales declined 12 percent from the fourth quarter, the Real Estate Institute said on April 16.

Finance Minister Bill English last week said the economy’s recovery was “quite patchy” and the government isn’t expecting a significant increase in revenue that will help narrow its budget deficit. The budget on May 20 will continue a pattern of tight control over government spending, he said.

Prime Minister John Key’s government is also considering a package of lower income taxes and a higher sales tax to buoy savings, investment and growth. Key, who will face an election late next year, attracted 49 percent support as preferred prime minister, down from 50 percent in December, according to a TV3 News poll this month.

Kirkcaldie & Stains Ltd., which operates a department store in central Wellington, last week said retail sales are “subdued as consumers remain cautious about the economic situation.” The year ahead will remain difficult for retail trading, it said in a statement sent to the stock exchange.

Unemployment

Bollard last month forecast the economy would expand 0.9 percent in the first quarter. Some economists say growth could be half that pace as business investment intentions remain weak and the jobless rate sits at a 10-year high of 7.3 percent.

Still “the economy is slowly but surely staggering to its feet,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington.

The central bank in March forecast the economy will expand 3.2 percent this year and 4.2 percent in 2011, stoking annual inflation to 2.8 percent by the end of next year. Bollard is required to keep inflation between 1 percent and 3 percent. Consumer prices rose 2 percent in the year ended March 31.

Buoying growth, global commodity prices are rising and New Zealand’s currency has dropped 1.2 percent against the U.S. dollar the past three months, making exports less expensive.

Tightening Cycle

The currency has pared its losses the past week as investors increase bets of a more aggressive tightening cycle in the second half of the year. It bought 71.26 U.S. cents at 10.30 a.m. in Wellington trading.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, yesterday increased its milk price forecast by 7 percent, citing higher prices. The payout to its 10,500 New Zealand suppliers will lift farm incomes by NZ$1.7 billion.

New Zealand’s manufacturing industry expanded at the fastest pace in more than two years in March amid rising production and orders, according to an index compiled by Bank of New Zealand Ltd. and Business New Zealand, a Wellington-based employer group.

Companies are slightly more optimistic about profits and sales while investment and employment intentions have improved, the New Zealand Institute of Economic Research inc. said in a report on April 6, citing a March survey of 791 companies.

Consumer confidence was little changed in April, although respondents were more optimistic about future conditions, ANZ National Bank Ltd. and Roy Morgan Research said in an April 22 report.

To contact the reporters on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

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