New Zealand Raises Benchmark Rate for Second Month
Alan Bollard, governor of the Reserve Bank of New Zealand, speaks during a news conference at the central bank, in Wellington. Photographer: Mark Coote/Bloomberg
New Zealand’s central bank raised interest rates for a second straight month and signaled it plans to slow the pace of future increases, sending the nation’s currency to its lowest level in a week.
“Further removal of monetary policy stimulus is appropriate,” central bank Governor Alan Bollard said in a statement in Wellington today after boosting the official cash rate by a quarter percentage point to 3 percent. “The pace and extent of further cash rate increases is likely to be more moderate than was projected in the June statement.”
New Zealand joins 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. The currency fell today after Bollard said its recent gains were “inconsistent with the softening” of the nation’s economic outlook and “moderation” in export commodity prices.
“The Reserve Bank is clearly reassessing its forecasts of the economy,” said Philip Borkin, economist at Goldman Sachs JBWere Ltd. in Auckland “We now see a reasonable possibility that the bank pauses at its September meeting.”
New Zealand’s dollar dropped 0.7 percent to 72.26 U.S. cents at 11:20 a.m. in Wellington from 72.73 cents immediately before the central bank’s statement. There is a 66 percent chance of a quarter-point rate rise at the next review on Sept. 16, according to a Credit Suisse index based on swaps trading.
Best Performer
The currency has gained 10 percent against the U.S. dollar in the past year, the best performer of the 16 major currencies tracked by Bloomberg, and this week reached a six-month high.
Today’s move was predicted by all 14 economists surveyed by Bloomberg News. Traders expect the rate will rise to 3.9 percent in a year’s time, down from a 4 percent target late yesterday, according to another Credit Suisse index.
Bollard last month 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.
“Trading partner growth has turned out stronger than we predicted, however future prospects have deteriorated,” Bollard said today. “While still at high levels, commodity prices have moderated.”
Prices of logs, aluminum and other exports 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.
Exports Decline
Exports, which make up 30 percent of the economy, declined 9.8 percent in June from a record in May, Statistics New Zealand said today. Sales of dairy products, meat, crude oil and fruit led the drop. Still, overseas shipments are 17 percent higher than a year earlier, the agency said.
Central banks in the Asia-Pacific region 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 on July 27 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.
Government Policies
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.
The governor last month forecast the consumer prices index 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. Today’s statement didn’t contain new forecasts.
“Annual CPI inflation has been near 2 percent for the past five quarters,” he said today. “As the economy grows, inflationary pressures are expected to pick up.”
The central bank doesn’t expect the jump in prices will have a lasting impact on inflation, Bollard said.
Households ‘Cautious’
“The outlook for economic growth has softened,” Bollard said. “Domestic demand is subdued. Households are cautious” and the recent slowing in immigration “will act to further dampen consumer spending,” he said.
The governor on June 10 forecast the economy will grow 3.8 percent in the first quarter of 2011 from a year earlier.
“We continue to predict respectable near-term GDP growth,” he said today.
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.
Business confidence dropped for a second month in July, ANZ National Bank Ltd. said yesterday, citing a survey of 485 companies. A net 32.4 percent of companies surveyed expect sales and profits will increase over the next 12 months, down from 38.5 percent in June.
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.
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