N.Z. Company Optimism, Card Spending Add to Rate Rise Pressure

New Zealand business optimism neared a four-year high and consumer spending rose at almost twice the pace economists forecast, adding to signs the central bank may be forced to raise interest rates sooner than it has signaled.

A net 32 percent of firms surveyed last quarter expect the economy to improve in the next six months, the most since the third quarter of 2009, the New Zealand Institute of Economic Research Inc. said today. Spending on credit and debit cards in June rose 1.1 percent, compared to the 0.6 percent increase predicted in a Bloomberg News survey of eight economists, Statistics New Zealand reported.

Strengthening economic growth and a surging housing market put pressure on Reserve Bank of New Zealand Governor Graeme Wheeler to raise interest rates from a record-low 2.5 percent after he signaled last month no change until mid-2014. The central bank is reluctant to raise borrowing costs because that may re-ignite demand for the nation’s currency and curb returns from exports, which make up about 30 percent of the economy.

“The market has become increasingly of the view that rate hikes are coming sooner than the Reserve Bank had published,” said Doug Steel, economist at Bank of New Zealand Ltd. in Wellington. “It’s a question of will the Reserve Bank change its views toward what’s been priced in, or not.”

There is about an 85 percent chance of a rate rise by March, up from 80 percent on July 1, according to swaps data compiled by Bloomberg.

Prudential Tools

Wheeler on June 13 said he didn’t expect to raise borrowing costs this year, and the same day the central bank published projections for three-month bank bill yields that signal no rate increase until the second half of 2014.

The central bank is readying new prudential tools to tackle the housing market, preferring to limit bank lending rather than attack demand by raising interest rates.

“We at the Reserve Bank see the current overheated housing market as a real threat to future financial stability,” Deputy Governor Grant Spencer said in a June 27 speech. Policy makers are “well aware that any official cash rate increases at this time would likely put unwanted pressure on the exchange rate,” he said.

New Zealand’s dollar has dropped 8.6 percent the past three months, the second worst performer after the Australian currency among 10 developed-world currencies, as U.S. policy makers signal they may reduce stimulus and after Wheeler said May 8 he had intervened to sell the currency. It fell 0.2 percent to 77.82 U.S. cents at 1:15 p.m. in Wellington.

Thirteen of 14 economists surveyed by Bloomberg in early June, including Steel, expected a rate rise by March 31 as economic growth picks up and stokes inflation.

RBNZ Forecasts

The RBNZ projected annual growth would accelerate to 3.6 percent by the second half of 2014 from a 2.4 percent pace in the first quarter this year. Annual inflation is projected to reach 1.9 percent by the end of 2014.

House prices rose 7.6 percent in June from a year earlier, the fastest annual pace since February 2008, according to a report today from Quotable Value New Zealand, a property research company. Prices in Auckland, home to a third of New Zealand’s 4.4 million people, surged 13 percent.

Card spending was led higher by spending on fuel and hospitality, the statistics agency said today. Excluding spending on fuel and vehicles, spending rose 0.7 percent.

Businesses are starting to invest and hire as their outlook for the economy improves, the Wellington-based NZIER said in its quarterly report, based on a survey of 783 firms.

A net 18 percent expect their own sales and profits will improve in the third quarter, and a net 9 percent plan to increase hiring, the report showed. The net figures subtract pessimists from optimists.

“We’re seeing momentum in the recovery,” Jean-Pierre de Raad, chief executive of the NZIER, told reporters. “Businesses optimism is translating into hiring and investment, which supports that momentum.”

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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