“Sustained strength in the New Zealand dollar would reduce the need for further increases in the cash rate,” Governor Alan Bollard said at a news conference in Wellington today after leaving the official cash rate at 2.5 percent. The central bank’s forecasts “are not inconsistent with a story that would see that remaining in place for much of this year,” he said.
New Zealand’s dollar has gained 11 percent in the past year, the best performing Group of 10 currency, reducing the cost of imports, while weak economic growth is also curbing inflation. Bollard today forecast consumer prices will rise 1.4 percent in the year ending Sept. 30, the weakest annual pace in more than 12 years, adding to the case for him to extend a yearlong rate pause.
Currency strength “creates more of a drag on the economy,” said Doug Steel, economist at Bank of New Zealand Ltd. in Wellington, who revised his rate forecast after today’s statement. He now expects the next rate rise in December, after earlier predicting an increase in September.
“The high value of the New Zealand dollar is detrimental to the tradable sector, undermines GDP growth and inhibits rebalancing in the New Zealand economy,” Bollard said. The currency has been boosted by an easing in global monetary policy and an increase in appetite for riskier assets, he said.
New Zealand’s dollar fell as low as 81.41 U.S. cents after his comments from 81.95 cents immediately before the statement. It pared its losses and bought 81.84 cents at 5:20 p.m. in Wellington as gains in Asian stocks supported demand for high yielding currencies.
The central bank forecasts the three-month bank bill yield will be 3 percent in the fourth quarter, down from 3.6 percent in its December projections, according to the monetary policy statement also published today. It forecasts 3.3 percent by the end of 2013, down from a previously projected 4 percent.
The forecasts, which are seen as a guide to the level of the cash rate, assume the currency will decline on a trade- weighted basis over the next three years, the central bank said. Should this not occur, all else equal, there would be less need to raise interest rates, it said.
There is a 44 percent chance of a quarter-point rate rise by December, down from 52 percent late yesterday, according to swaps prices from Westpac Banking Corp. (WBC) Deutsche Bank AG today said it expects the first rate rise in December rather than in September, according to an e-mailed note from chief New Zealand economist Darren Gibbs.
Bollard has left the cash rate unchanged since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years in Christchurch, its second- largest city, and the surrounding Canterbury province, which killed 185 people and closed the central city.
The recovery has been slow amid concerns that Europe’s debt crisis would spill over into weak global demand for exports, which make up 30 percent of New Zealand’s economy.
‘Signs of Recovery’
“The domestic economy is showing signs of recovery,” he said. “Household spending appears to have picked up over the past few months and a recovery in building activity appears to be under way. That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year.”
Fletcher Building Ltd. (FBU), New Zealand’s biggest building products maker, last month said profit in the year ending June 30 may fall as much as 14 percent because of weak housing markets and delays in reconstruction.
Australia’s central bank this week held interest rates for a second month after two reductions in late 2011, citing a positive outlook for the Chinese and U.S. economies. South Korea and Indonesia will leave borrowing costs unchanged later today, according to Bloomberg surveys of economists.
“Policy actions from a number of central banks have boosted global confidence,” Bollard said today. Still, “risks to the global outlook remain,” he said.
New Zealand’s economy is growing at a slower pace than previously projected, the central bank said in its monetary policy statement also released today.
The economy will probably grow 1.8 percent in the year ending March 31, down from 2 percent predicted in the December policy statement, the central bank said.
Growth will improve to 3.1 percent in the 12 months through March 2013, faster than the 2.9 percent pace projected in December, the central bank said. Residential construction is projected to surge 27 percent.
Inflation in the year through September will be 1.4 percent, the slowest since 1999. Consumer prices will rise 1.7 percent this year, down from 2 percent forecast in December, and 1.9 percent in 2013, the central bank said.
Inflation won’t reach the midpoint of the 1 percent to 3 percent range that Bollard is required to target until the second half of 2014, it said.
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