New Zealand’s central bank said economic growth has accelerated and it’s concerned about rising home prices after keeping borrowing costs unchanged today, sending the nation’s currency higher.
“Growth in the New Zealand economy has picked up,” Reserve Bank Governor Graeme Wheeler said in a statement released in Wellington after leaving the official cash rate at a record low 2.5 percent. “The bank does not want to see financial or price stability compromised by housing demand getting too far ahead of supply.”
Wheeler extended the central bank’s two-year rate pause as drought, government spending cuts and a stronger New Zealand dollar curb economic growth and contain prices. The so-called kiwi rose as high as 84.58 U.S. cents compared with 83.99 cents before the statement as Wheeler refrained from expressing deeper concerns about the currency’s strength and reiterated warnings on the property market.
“One risk is that the strong housing market and the Canterbury rebuild provoke greater economic growth than anticipated, requiring earlier or more aggressive OCR hikes,” said Dominick Stephens, chief economist for Westpac Banking Corp. (WBC) in Auckland. “We expect to keep the OCR unchanged through the end of the year.”
The rate decision was forecast by all 15 economists in a Bloomberg News survey.
With annual inflation slower than the central bank’s 1 percent to 3 percent target for the third straight quarter in the three months ended March 31, Wheeler repeated he expects to keep the benchmark rate unchanged through the end of the year.
Wheeler today reiterated his confidence the economy will rebound, led by global growth, a lift in consumer spending and reconstruction of earthquake devastated Christchurch, according to the statement.
“Global financial market sentiment remains buoyant and the medium-term outlook for New Zealand’s overall trading partner growth remains firm,” he said.
The New Zealand dollar traded at 84.34 U.S. cents at 9:43 a.m. in Wellington. It has gained 47 percent in the past four years.
“The New Zealand dollar remains overvalued and is higher than projected in March,” Wheeler said. “Further appreciation has occurred partly in response to the announcement of a substantial quantitative easing program in Japan.”
The currency gains continue to be a “significant headwind for the tradables sector, restricting export earnings and encouraging demand for imports,” he said.
“The RBNZ’s comments on the New Zealand dollar were more neutral than expected,” Jane Turner, senior economist at ASB Bank Ltd. in Auckland, said in a note. “It appears many in the market were anticipating more opinionated comments.”
Consumer prices rose 0.9 percent in the first quarter from a year earlier, matching the RBNZ projection.
Inflation “is expected to remain close to the bottom of the target range this year,” Wheeler said. “Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise toward the 2 percent target midpoint.”
Wheeler, who took over from Alan Bollard in late September, signed an agreement with English in which he undertook to keep inflation near the midpoint of the target range. The central bank doesn’t expect inflation to reach 2 percent until the second half of 2015, according to its March 14 monetary policy statement.
Policy makers are watching the housing market for signs of inflation pressure. Prices rose 6.5 percent in March from the year-earlier month, the fastest pace since 2008, according to Quotable Value New Zealand, the government-owned property research company.
“House price inflation is high in some regions, despite prices already being elevated,” Wheeler said.
Earlier this month, Deputy Governor Grant Spencer said “a monetary policy response would become more likely” if the house price and credit expansion begins to fuel excessive consumption spending and inflationary pressures.
“The current rate of house price inflation, if it continues, is likely to be accompanied by higher interest rates sooner, and higher exchange rates,” Finance Minister Bill English said April 11.
The central bank has left the cash rate unchanged since March 2011 to allow the economy to recover from the earthquakes that battered the South Island city of Christchurch and to revive confidence after Europe’s sovereign debt crisis curbed global demand.
New Zealand faces an estimated NZ$30 billion ($25.3 billion) rebuild of its third-largest city after a series of temblors that began in late 2010, including the nation’s deadliest earthquake in 80 years in February 2011 when 185 people were killed and roads, homes and commercial property were wrecked.
New Zealand has declared drought throughout the North Island, including Waikato and Taranaki, the largest dairying provinces, as well as a small part of the South Island. Minister for Primary Industries Nathan Guy yesterday welcomed recent rain, while adding that the problems created by the dry summer will be felt for many months.
Fonterra Cooperative Group Ltd. (FCG), the world’s biggest dairy exporter, said April 11 that March milk collection fell 16 percent from the year earlier.
“Drought has lowered agricultural production and will likely also negatively affect farm output in the coming season,” Wheeler said today. “International dairy prices have spiked higher in response to the drought but these price gains could prove temporary.”
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