New Zealand’s central bank may delay interest-rate increases until next year as the nation’s deadliest earthquake in 80 years threatens to tip the economy into a recession.
A magnitude 6.3 quake rocked the South Island city of Christchurch, killing at least 75 people, toppling buildings and closing the airport. The temblor’s economic costs will put more strain on consumer confidence, tourism revenue and public finances already facing an estimated NZ$5 billion ($3.7 billion) cleanup bill from a Sept. 4 quake in which no one died.
New Zealand’s currency and swap rates slid on speculation the damage will extend the Reserve Bank of New Zealand’s rate pause and increase the risk that the economy will shrink. The central bank’s view that rebuilding from last year’s quake will help growth this year may need to be revised as construction costs increase and repair plans are redrawn.
“One of the pillars for what we thought would be strong growth in 2011 has been pushed back,” said Doug Steel, markets economist at Bank of New Zealand Ltd. in Wellington. “Clearly, reconstruction from last year’s earthquake is going to be delayed and more rebuilding will be required. The boost is more likely to come in 2012 than this year.”
New Zealand’s currency yesterday slid to its lowest level of the year against the U.S. dollar. It traded today at 74.64 U.S. cents as of 5:07 p.m. in Sydney after yesterday falling to as low as 74.51 cents, the lowest since Dec. 23.
The five kilometer-deep quake, which struck at 12:51 p.m. local time, brought down parts of buildings in the center of New Zealand’s second-largest city, including the cathedral. As the disaster entered its second day, rescuers dug through rubble in Christchurch, a city of almost 400,000 people, searching for bodies or survivors.
“Talking to family down there, they thought the earthquake was more severe than last year’s,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland, who grew up in Christchurch. He said yesterday’s disaster may cut 0.2 percentage point from gross domestic product “or possibly more as the extent of the damage becomes clear.”
The cost to lock in fixed interest rates in New Zealand instead of floating payments for eight months yesterday fell by the most since April 2009 on speculation the Reserve Bank will keep its key rate unchanged until at least October.
RBNZ Governor Alan Bollard has kept the official cash rate at 3 percent since July, and in his January policy statement said rates were “likely to increase modestly over the next two years.” That so-called tightening bias might change depending on the severity of the disaster, and a rate cut can’t be ruled out.
“If there was any chance that Dr. Bollard was considering tightening in the next couple of quarters, that would now be completely removed from his thinking,” said Roland Randall, an economist at TD Securities Inc. in Singapore. “Although it is too extreme to expect that he will cut the policy rate as a result of this event alone, that is a possibility.”
The chances doubled today Bollard will cut rates at next month’s policy meeting, according to a Credit Suisse AG index based on swaps trading. Investors are betting there is a 56 percent chance Bollard will reduce the rate by 25 basis points at the RBNZ’s March 10 meeting, up from 28 percent yesterday, the index shows.
In a statement released earlier, Bollard said the RBNZ is working quickly to assist in the recovery of access to the financial system and ensure markets “remain stable.”
“The Reserve Bank is ready and able to supply any cash required by banks,” Bollard said. “We have ample cash reserves and will issue cash to banks on any day required during this emergency situation.”
Swaps markets are betting there’s a 20 percent possibility the central bank will cut the benchmark rate at its next meeting, a Credit Suisse AG index showed after the quake.
Earlier this month, Finance Minister Bill English said the nation’s economy may have entered its second recession in two years by contracting in the fourth quarter of last year.
“We had been expecting the recovery effort from the previous earthquake in Christchurch to be ramping up about now and starting to have a positive impact on GDP,” English said today on Bloomberg Television. “This more severe earthquake will now delay the recovery.”
The country’s economy was hobbled before yesterday’s quake. New Zealand’s retail sales fell 0.4 percent in the fourth quarter, matching the decline during the previous quarter in which GDP shrank 0.2 percent. The government’s GDP report for the final three months of 2010 is scheduled to be released March 24.
Consumer confidence slumped to a 19-month low this month, weighed down by more pessimism about personal finances and the economy’s performance in the next year, a private survey showed last week. The ANZ-Roy Morgan confidence index fell to 108.1 from 117.1 in January, Wellington-based ANZ National Bank Ltd. said in a monthly survey.
Two straight quarters of shrinking GDP -- a standard definition of a recession -- would make New Zealand the first country with a Group of 10 currency to slide back into a contraction since the end of 2009.
“Our view is that the Reserve Bank won’t be hiking interest rates this year; we’ve pushed our rate hike out until 2012,” Khoon Goh, head of market economics at ANZ National Bank Ltd. in Wellington, said yesterday in an interview.
Yesterday’s quake hit just as residents and businesses in the Christchurch area were starting to rebound from last September’s quake. An aftershock Dec. 26 cut short annual “Boxing Day” shopping sales, so retailers held them again on Feb. 12 to try to recoup lost revenue.
“The recovery continues to face headwinds from households shunning spending in favor of saving and reducing debt,” Katrina Ell, an associate economist at Moody’s Analytics, said yesterday in a research note. “Tuesday’s tragic events could exacerbate this trend, condemning the New Zealand economy to another year of anemic growth due to forces beyond its control.”
To contact the editor responsible for this story: Stephanie Phang at firstname.lastname@example.org