Earthquake Damage May Force New Zealand to Delay Rate Increase

New Zealand will probably keep its benchmark interest rate unchanged tomorrow as the nation’s worst earthquake in eight decades curbs economic growth and slowing consumer spending reduces the threat of inflation.

Central bank Governor Alan Bollard will leave the official cash rate at 3 percent at 9 a.m. in Wellington, according to all 14 economists surveyed by Bloomberg News, after the Treasury Department projected the Sept. 4 temblor may cut as much as 0.8 percentage point from growth this quarter.

Bollard, who boosted borrowing costs for a second straight meeting in July, would join regional counterparts from Australia to South Korea to Malaysia in pausing on rates as they gauge the strength of the global economy. The magnitude 7 quake in the South Island city of Christchurch came as recent reports showed retail sales and manufacturing shrank and housing demand slowed.

“Neither growth nor underlying inflation appears to be tracking as firmly as the Reserve Bank projected when it began to raise the cash rate in June,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. “The earthquake is likely to result in a measurable loss of output and confidence in the near term.”

Shops and factories closed after the quake, which cut power and damaged more than 100,000 homes and severed water and sewage lines in and around New Zealand’s second-largest city. The Treasury says reconstruction may spur a rebound in 2011, with growth projected to be 0.5 percentage point stronger in the year ending June 30.

‘Direct Lift’

“Activity will be directly boosted in 2011 as the rebuilding phase gets under way,” said Gibbs. “Construction will provide a sizeable direct lift to the regional economy.”

Stocks of New Zealand building materials companies have surged since the earthquake on expectations of increased demand during the reconstruction period. The NZX Building Materials and Construction Index gained 8.8 percent as of 11:45 a.m. in Wellington, more than three times the all-stocks index.

Prime Minister John Key’s government will also deliver a boost to the economy with income tax cuts on Oct. 1, which will match an increase in sales tax. Bollard said Aug. 19 he will monitor the response to the increase in sales tax to determine whether underlying inflation pressures are accelerating.

Even before the quake, the chances of the bank raising rates had diminished as evidence mounted of slowing domestic demand. In June, the central bank forecast growth of 1.1 percent in the second quarter. A month later, Bollard said the outlook had “softened somewhat” and the pace of further rate increases may be more moderate.

Regional Banks

Uncertainty over the global recovery has prompted other central banks in the region to pause on rates. The Bank of Korea left its benchmark rate unchanged on Sept. 9, saying a possible U.S. slowdown and persistent European fiscal problems are risks to economic growth. The Reserve Bank of Australia on Sept. 7 kept its overnight cash rate target unchanged for a fourth month, saying growth in the U.S. looked weaker. Malaysia also kept its overnight policy rate steady after three straight increases.

A Credit Suisse index based on swaps trading shows there is a 4 percent chance of Bollard boosting borrowing costs by a quarter point tomorrow. Just one economist expects a rate increase at the review on Oct. 28, while 10 expect a move in December.

Economic Forecasts

The central bank also updates its economic forecasts tomorrow and is likely to outline a slower growth path, economists say, in line with recent reports.

House sales fell for a fifth month in August, the Real Estate Institute of New Zealand reported yesterday. Prices rose 0.9 percent from the year earlier, the institute said, citing a monthly index.

Retail sales declined 0.4 percent in July, Statistics New Zealand said yesterday, as spending fell at 14 of 24 store categories, led by vehicle dealers, liquor retailers and department stores. Spending on credit and debit cards fell 0.2 percent in August, the agency said in a report today.

“We do expect in the medium to long term the gradual recovery will continue, but it’s likely in the next 12 months demand will remain patchy,” Ian Morrice, chief executive officer of Warehouse Group Ltd., the nation’s biggest discount retailer, said last week.

Manufacturing sales volumes slumped to a 10-year low in the second quarter, according to a Sept. 9 government report. Production was led lower by seafood, fruit, meat, dairy and textiles, adding to signs that global demand for some commodity exports has slowed.

Resumption of Moves

Even so, Bollard has to take a medium-term view of the economy and inflation, which suggest rates will start rising again later this year, said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington.

“The bank should still be nervous about keeping the cash rate too low for too long,” he said. He expects a quarter-point increase in December.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, last month left unchanged how much it expects to pay New Zealand farmers supplying its milk because of signs that global prices may strengthen. Milk powder prices increased at an auction on Sept. 2, the Auckland-based company said.

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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