New Zealand's Bollard May Keep Rate Unchanged at 3%, Lower Growth Forecast

New Zealand’s central bank will probably keep its benchmark interest rate unchanged and may lower economic forecasts as domestic demand weakens and dry weather threatens farm production.

Reserve Bank of New Zealand Governor Alan Bollard will leave the official cash rate at 3 percent at 9 a.m. tomorrow in Wellington, according to all 14 economists surveyed by Bloomberg News. Ten analysts expect the first rate rise in March and four forecast an increase in the second quarter, the survey showed.

Weaker growth and a pause in rates may curb demand for New Zealand’s currency, the third-best performer in the past year among Group of 10 currencies. Bollard also may lower growth forecasts and signal a more gradual increase in borrowing costs because of concerns a drought may curb overseas sales of milk, meat and other exports, which make up 30 percent of the economy.

“The RBNZ’s projections will imply a slightly later resumption of the tightening cycle,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. “Risks to agricultural sector production from the possible continuation of recent very dry weather and the disease impacting kiwifruit vines will also be weighing on the governor’s mind.”

Photographer: Mark Coote/Bloomberg

Alan Bollard, governor of the Reserve Bank of New Zealand. Close

Alan Bollard, governor of the Reserve Bank of New Zealand.

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Photographer: Mark Coote/Bloomberg

Alan Bollard, governor of the Reserve Bank of New Zealand.

Parts of the country are “heading for extremely dry conditions, probably drought,” Agriculture Minister David Carter said in a Dec. 2 interview.

Fruit, Oysters

A bacterial disease that affects vine growth has been detected in 107 kiwifruit orchards, threatening the NZ$1.4 billion ($1.1 billion) export industry. The country is also investigating a surge in deaths on local marine farms of Pacific oysters, an industry estimated to be worth NZ$26 million in 2009.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, said on Dec. 2 it was watching weather conditions closely. North Island milk collection fell 4.3 percent last year because of dry conditions in the largest milk-producing province.

Government reports released today showed construction and manufacturing contracted in the third quarter.

The value of residential construction excluding inflation fell 5.3 percent from the second quarter and non-residential construction dropped 0.7 percent, Statistics New Zealand said in Wellington. Manufacturing sales volumes fell for a third straight quarter, declining 1.4 percent, a separate report showed.

RBNZ’s Forecasts

Gibbs expects the central bank will lower its forecasts for growth in the year ending March 31, 2011, from 2.8 percent because of weakness in the housing market and consumer spending, and the disruption caused by the magnitude 7 earthquake that struck Canterbury province Sept. 4.

Gross domestic product increased 0.2 percent in the three months ended June 30, less than a quarter of the pace Bollard predicted in September. Third-quarter growth may also miss the central bank’s 0.8 percent forecast.

Bollard said in a Nov. 19 speech that the economic recovery “could yet be a prolonged process” amid sluggish demand and a weak recovery in major markets for New Zealand goods such as the U.S., Japan and the U.K.

Australia’s central bank yesterday left its benchmark rate unchanged at 4.75 percent, saying inflation is expected to be “little changed” over the next few quarters and citing market volatility tied to concerns about European government debt.

EU Debt

European finance ministers, who last week handed Ireland an 85 billion euro ($113 billion) lifeline, yesterday ruled out immediate aid for Portugal and Spain. Sovereign debt issues in Europe “add further weight to the Reserve Bank remaining on hold for the time being,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland.

New Zealand’s domestic economy has been slowed by a weak housing market and sluggish consumer spending, even as unemployment declines, economists said.

House prices in November rose 0.3 percent from a year earlier, the smallest gain since October 2009, according to a report yesterday from Quotable Value, a government agency.

Consumer purchases on debit, credit and store cards rose 0.8 percent in October, Statistics New Zealand said on Nov. 9. Excluding fuel outlets, spending was unchanged.

“We are witnessing a tightening of retail demand,” Warren Bell, chairman of New Zealand apparel retailer Hallenstein Glasson Holdings Ltd., told the company’s annual meeting in Christchurch yesterday. “The opportunity to improve sales and margin on the existing business base is now far more challenging.”

Confidence Levels

Consumer confidence was near a 14-month low in November, according to an ANZ National Bank Ltd. Still, business confidence rose for a third month on expectations for more hiring and investment, ANZ National said in a second survey published Nov. 29.

The third-quarter jobless rate fell to 6.4 percent and employers added 22,000 workers, about twice the pace expected in a Bloomberg News survey, according to figures published Nov. 4.

Consumer prices rose 1.5 percent in the 12 months ended Sept. 30, the smallest increase in six years, according to a government report in October. Still, inflation is likely to peak at 4.8 percent by mid-2011 as the sales tax is included, the central bank forecasts.

Bollard is required to keep inflation in a range of 1 percent to 3 percent, and the central bank forecasts prices excluding the effects of the sales tax will peak at 2.1 percent for the year ending June 2011.

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

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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