New Zealand Set to Add to Rate Rise as Inflation Risk Lingers

New Zealand will probably raise its benchmark interest rate for a second month to control inflation in an economy driven by international demand, including China’s for the nation’s milk, rather than domestic spending.

Central bank Governor Alan Bollard will increase the official cash rate by a quarter point to 3 percent at 9 a.m. in Wellington tomorrow, according to all 14 economists surveyed by Bloomberg News. The nation’s currency surged to a six-month high yesterday as traders bet borrowing costs will keep rising.

New Zealand is joining nations from South Korea to India to Malaysia in removing monetary stimulus as Asia-Pacific economies recover from the financial crisis and grapple with rising prices. An index based on swaps trading shows there is a 98 percent chance Bollard will move, even as retail spending and the housing market remain subdued.

“The outlook for an export-led recovery remains in place, albeit at a slightly more modest pace compared to the bank’s forecasts in June,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “The softer growth outlook does not allow for comfort on the inflation front.”

Bollard on June 10 raised the cash rate a quarter point from a record-low 2.5 percent, the first increase in three years, and said he expected to gradually remove stimulus as exports buoy the recovery and inflation pressures build.

Exports Surge

Exports, which make up 30 percent of the economy, rose to a record in May with purchases by China, the biggest market for New Zealand’s dairy products, rising 26 percent from a year earlier, according to government figures.

Even so, commodity export prices fell in June, and milk powder auction prices declined in July for a third month, according to Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter.

Growth across New Zealand’s trading partners is likely to be revised lower in coming months, said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. The International Monetary Fund this month cut its 2011 growth forecasts for every Group of Seven industrial nation bar the U.S.

“This doesn’t imply a dramatic change in trading partner outlook, but does imply a modestly less buoyant outlook for New Zealand’s commodity export prices,” Gibbs said.

New Zealand’s ties to Asian markets have underpinned the currency, which has surged 11.4 percent against the U.S. dollar in the past year, the best performer of the 16 major currencies tracked by Bloomberg. It reached as high as 73.97 cents yesterday, the most in more than six months. The currency bought 73.20 U.S. cents at 9:40 a.m. in Wellington.

Regional Banks

Central banks in the Asia Pacific are responding to growing demand by removing the low interest rates put in place during the financial crisis. The Bank of Korea raised its benchmark interest rate a quarter-point to 2.25 percent on July 9. The same day, Malaysia’s central bank boosted borrowing costs for the third time this year.

The Reserve Bank of India yesterday increased a key interest rate more than economists forecast, as it battles to contain a surge in inflation. It raised the reverse repurchase rate a half point to 4.5 percent, and the repurchase rate to 5.75 percent from 5.5 percent.

Australia’s central bank has kept its overnight cash rate target unchanged at 4.5 percent for the past two meetings, after raising borrowing costs six times since early October.

Bollard’s focus is on keeping inflation between 1 percent and 3 percent as the economy grows and Prime Minister John Key’s policies affect price expectations and wage setting.

The government introduced an emissions trading plan effective July 1, boosting fuel and electricity costs, and from Oct. 1 the sales tax on all goods and services increases.

Price Increases

Bollard forecast prices would rise 5.3 percent in the year ending June 30, 2011, from 1.8 percent a year earlier. Excluding the one-time events, prices would rise 2.6 percent, he said.

New Zealand house sales and core consumer spending declined, according to recent reports, providing Bollard with scope to pause during the fourth quarter, some economists say.

House sales fell for a third month in June and it took longer to sell a property, according to Real Estate Institute figures published July 14. A separate report showed retail sales excluding vehicles and fuel declined for a second month in May.

The governor on June 10 forecast the economy will grow 3.1 percent this year after contracting 1.6 percent in 2009. He estimated gross domestic product increased 1 percent in the three months through June.

“Soft consumer spending suggests the bank’s second-quarter growth estimate is too optimistic,” said Deutsche’s Gibbs. “The economy will return to ‘trend’ a quarter of two later than had seemed likely earlier this year.”

Gibbs expects Bollard will raise rates again in September, then pause until next year.

Traders expect the cash rate will be 4.09 percent in a year’s time, according to a Credit Suisse index based on swaps trading.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.