New Zealand’s central bank said it intends to start raising borrowing costs “soon” as the economy strengthens. The currency fell as markets had priced in about a 50 percent chance of a rate increase today.
“There is a need to return interest rates to more-normal levels,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement in Wellington after leaving the official cash rate at a record-low 2.5 percent. “The bank expects to start this adjustment soon.”
New Zealand is set to become one of the first developed nations to begin raising its benchmark interest rate as accelerating economic growth and a housing boom stoke price pressures. Recent currency gains gave Wheeler the scope to prolong the period of record-low borrowing costs to three years.
“While the RBNZ did not deliver today, the tone of the statement makes it clear that the OCR will move up in March,” ANZ Bank New Zealand Ltd. chief economist Cameron Bagrie, who expected an increase today, wrote in a research note. “With the Governor keen to cement his inflation credentials early in his tenure, the message from today’s RBNZ statement is that the OCR is moving up in short order.”
The RBNZ announcement came an hour after the Federal Reserve said it plans to trim its monthly bond buying by $10 billion to $65 billion, as it sticks to a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. U.S. stocks fell, pushing the Standard & Poor’s 500 Index to a two-month low, while Treasuries and the yen gained after the Fed decision.
The kiwi bought 82.12 U.S. cents at 11:22 a.m. in Wellington, down from 82.72 cents immediately before Wheeler’s statement.
“Given there was some pricing for a January hike, a selloff is unsurprising,” Imre Speizer, a currency strategist at Westpac Banking Corp. in Auckland, said in a note to clients. “The market had expected an explicit signal it would start hiking in March. The signal is there, but it is relegated to the second-last paragraph.”
Swaps traders had seen a 52 percent likelihood of a rate increase today, according to data compiled by Bloomberg at 7:30 a.m. in Wellington. They now see about a 90 percent chance of at least a 25 basis point increase in March.
Twelve of 15 economists expected no change today and a rate rise in March, while three had tipped a quarter-point increase today.
The RBNZ has kept borrowing costs at 2.5 percent since March 2011. Wheeler last month signaled he would increase the cash rate in the first half of 2014.
The RBNZ “remains committed to increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point,” Wheeler said. “The scale and speed of the rise in the OCR will depend on future economic indicators.”
Annual inflation accelerated to 1.6 percent in the fourth quarter, the fastest in almost two years and more than the central bank projected on Dec. 12, according to a government report this month.
“New Zealand’s economic expansion has considerable momentum,” Wheeler said, citing rising prices of dairy exports, immigration and construction work in earthquake-damaged Christchurch. Annual growth is expected to be about 3.5 percent through 2014, he said.
Approvals to build new homes rose 7.6 percent in December from a month earlier, beating economists’ estimates for a 5 percent decline, a report showed today. In a separate report on immigration, the statistics agency said permanent arrivals exceeded departures by 2,820 in December.
A gauge of business confidence climbed in the three months through December to the highest since the second quarter of 1994, while house prices jumped 10 percent in December from a year ago, the fastest annual increase since 2007, reports this month showed.
Company pricing intentions are rising and construction costs are increasing, Wheeler said. Still, “there appears to have been some moderation in the housing market in recent months,” he said.
Wheeler in October introduced limits on low-deposit home loans to help curb demand for property, rather than raise borrowing costs. In December, the volume of low-deposit loans had dropped to 5.6 percent of all new lending from 25 percent in September, central bank figures showed yesterday.
A strong currency is curbing inflation, Wheeler said today.
“The bank does not believe the current level of the exchange rate is sustainable in the long run,” he said.
Finance Minister Bill English yesterday said the kiwi dollar’s recent gains may reflect expectations of future interest-rate increases. He has expressed concern at the effect of the appreciation on exporters and said the government would like to see the exchange rate drop back.
There is uncertainty about the timing of the withdrawal of stimulus by nations such as the U.S. and its effects, especially on emerging market economies, Wheeler said.
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