N.Z. Business Confidence, Home Prices Build Case for Rate Rise

Photographer: Brendon O'Hagan/Bloomberg

Newly constructed houses stand in the suburb of Hobsonville Point in Auckland. Close

Newly constructed houses stand in the suburb of Hobsonville Point in Auckland.

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Photographer: Brendon O'Hagan/Bloomberg

Newly constructed houses stand in the suburb of Hobsonville Point in Auckland.

New Zealand business confidence surged to an almost 20-year high while house prices rose the most in six years, adding to signs the central bank will need to raise interest rates this quarter.

A gauge of business confidence climbed in the three months through December to the highest since the second quarter of 1994, the New Zealand Institute of Economic Research Inc. said today in Wellington. House prices jumped 10 percent in December from a year ago, the fastest annual increase since 2007, Quotable Value New Zealand said.

Improving business sentiment, surging home prices and rising consumer spending prompted investors to increase bets New Zealand will become the first developed economy to start raising interest rates. Twelve of 15 economists surveyed by Bloomberg expect Reserve Bank Governor Graeme Wheeler to increase borrowing costs from a record-low 2.5 percent by March.

“The economy is picking up faster than the RBNZ assumed,” Michael Gordon, senior economist at Westpac Banking Corp. in Auckland, said in a note after the confidence report. “Inflation pressures have remained in check. Our view remains the RBNZ will begin raising the cash rate in March.”

New Zealand’s dollar is the second-best performer this year after the yen among 16 major currencies tracked by Bloomberg on expectations of rate rises. It was little changed at 83.78 U.S. cents at 1.15 p.m. in Wellington. The odds of a March rate rise were 96 percent, according to swaps data compiled by Bloomberg.

Economic Momentum

The economy is showing “considerable momentum” and inflation pressures are projected to increase, Wheeler said last month when he signaled that interest rates would need to rise in 2014. The RBNZ has kept the official cash rate at 2.5 percent since March 2011. The next rate review is on Jan. 30.

One economist expects a rate rise this month, according to Bloomberg’s survey. There is a 43 percent chance of that occurring, according to swaps prices.

A net 52 percent of 866 respondents to the NZIER quarterly business opinion survey expected the economy to do better in the next six months, the institute said today. The net figure subtracts pessimists from optimists, and is adjusted for seasonal patterns.

A net 22 percent said they had experienced better trading conditions in the final three months of 2013, indicating that annual growth accelerated to 3.5 percent last year, the report showed. A net 31 percent expect trading to improve in the first quarter.

Hiring and investment intentions increased, and 16 percent of firms expect their profits will improve, the institute said. Pricing intentions are little changed and it’s slightly harder to find workers, adding to signs that pressure on wages and inflation will build this year.

Inflation Pressure

The survey is consistent with a broad economic recovery and provides the RBNZ with evidence of emerging inflation pressures, Shamubeel Eaqub, principal economist at the NZIER, told reporters.

“I don’t think it’s a smoking gun because the capacity pressures are certainly not frightening enough,” he said.

Wheeler in December said he was watching house prices closely, and the central bank last year introduced restrictions on low-deposit lending to curb demand. Still, annual house price inflation accelerated in December from a 9.2 percent pace in November, Quotable Value, a government owned property research company, said today.

Retail spending on credit and debit cards rose for a third straight month in December, gaining 0.6 percent, led by purchases at hospitality outlets and grocery stores, Statistics New Zealand said today. Spending gained 0.7 percent in November and 1.9 percent in October.

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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