New Zealand Keeps Record-Low Rate as Bollard Term Nears End

New Zealand signaled an 18-month pause in record-low interest rates may last through mid-2013 to help bolster an economy buffeted by weaker global growth and strained by one of the developed world’s strongest currencies.

“New Zealand’s trading partner outlook remains weak,” Reserve Bank Governor Alan Bollard told reporters in Wellington after leaving the official cash rate at 2.5 percent. “We have got a forecast that short-term interest rates are going to stay roughly where they are for another year, so that’s quite a stable sort of outlook.”

The decision was Bollard’s last in a 10-year tenure before he steps down later this month, succeeded by former World Bank co-managing director Graeme Wheeler. While the central bank signaled little need to raise borrowing costs until the second half of 2013 because of risks from Europe’s fiscal crisis and the outlook for New Zealand’s trading partners including China, economists are waiting to gauge Wheeler’s interpretation of conditions before agreeing.

“The forward guidance given in today’s statement has a fairly limited shelf life,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “We will reserve any judgment on changing our monetary policy forecast until we have a better understanding of Graeme Wheeler’s style.”

Currency Reaction

Today’s rate decision was forecast by all 16 economists in a Bloomberg News survey. New Zealand’s dollar bought 82.01 U.S. cents at 10:15 a.m. in Wellington from 82.07 cents immediately before the statement.

The so-called kiwi has advanced 5.6 percent this year against the U.S. dollar, making it the strongest performer among the Group of 10 currencies tracked by Bloomberg.

The central bank today forecast the three-month bank bill yield will be 2.7 percent in the first quarter next year, unchanged from the current quarter, according to the monetary policy statement.

The yield will rise slightly to 2.8 percent by the fourth quarter of 2013, and 3.2 percent a year later, the RBNZ said. The forecasts, which are seen as a guide to the direction of the cash rate, suggest no increase in the cash rate until the second half of 2013.

In the domestic economy, “fiscal consolidation is constraining demand growth, and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services,” Bollard said.

‘Headwinds’

“Headwinds for the economic outlook are still evident,” the central bank said in a separate monetary policy statement also released today. “Domestically, the unemployment rate remains elevated.” The jobless rate in the second quarter was 6.8 percent compared with 6.7 percent three months earlier.

Sluggish domestic demand and a rising currency are helping keep inflation within the central bank’s 1 percent to 3 percent target range while hurting exporters.

“Underlying annual inflation, which recently moved below 2 percent, is expected to settle near the mid-point of the target range over the medium term,” Bollard said.

Seven of the economists surveyed by Bloomberg forecast the next New Zealand rate increase will be in the first quarter next year. Four predicted the next rise will occur in the April-June period, three estimate the next tightening will come in the third quarter and two saw no change until after 2013.

Rebuilding Effort

Bollard has left the cash rate at 2.5 percent since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years. The February 2011 temblor struck Christchurch, New Zealand’s third-largest city, and the surrounding Canterbury province, killing 185 people and closing the central city.

Reconstruction is expected to accelerate next year, Bollard said.

“We have been talking to insurance companies and urging them to make sure they’re active,” he said. “We think it is starting to move and will help deliver the sort of rebuild numbers we are forecasting through next year.”

Bollard steps down on Sept. 25, ending his second five-year term. He will become executive director of the Asia-Pacific Economic Cooperation forum secretariat.

Wheeler returns to his homeland to lead the central bank after a 13-year career at the World Bank in Washington, including four years as managing director. He will sign a policy targets agreement with Finance Minister Bill English in coming days.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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