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N.Z. Says Interest Rate Rises Will Be ‘More Limited’

N.Z. Says Interest Rate Rises Will Be 'More Limited'
Reserve Bank of New Zealand Governor Alan Bollard speaking in a news conference at the central bank in Wellington. Photographer: Mark Coote/Bloomberg

New Zealand’s central bank left its benchmark interest rate unchanged, saying increases in the next two years will be slower than earlier indicated as the nation’s worst earthquake in 80 years curbs near-term economic growth.

“It seems prudent to keep the cash rate low until the recovery becomes more robust and underlying inflation pressures show more obvious signs of increasing,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at 3 percent. “Interest rates are now projected to rise to a more limited extent over the next two years than signaled” in September.

New Zealand’s dollar dropped to the lowest in a week after the decision as traders bet Bollard will delay any increase until the second quarter. The central bank today cut forecasts for consumption and gross domestic product because of the effects of the magnitude 7 earthquake that struck near the South Island city of Christchurch on Sept. 4.

“The Reserve Bank wants to see more reality and will be less inclined to pre-empt the recovery,” said Jane Turner, economist at ASB Bank Ltd. in Auckland. “This implies an even later resumption to the tightening cycle. The Reserve Bank will wait until June before it hikes the cash rate.”

Before today, 10 of 14 economists surveyed by Bloomberg News, including Turner, expected the first increase in borrowing costs would come in March, with four forecasting no change until the second quarter.

Dollar Selling

New Zealand’s currency fell after the statement, dropping as low as 74.35 U.S. cents from 74.94 cents immediately before the statement. It bought 74.71 cents at 10:29 a.m. in Wellington.

Bollard said the currency’s 12 percent gain the past six months has put pressure on the nation’s exporters, and he urged the government to bring the budget back into balance at a faster pace to relieve that difficulty. Finance Minister Bill English has said the budget will be in deficit until 2016.

“Accelerated elimination of the fiscal deficit could help improve national savings, thereby easing pressure on interest rates and the New Zealand dollar,” Bollard said.

The economy will grow an annual average of 1.7 percent in the year ending March 31, less than the 2.8 percent pace forecast in September, the central bank said in its quarterly policy statement, also published today.

Weak Growth

Third-quarter growth was probably 0.3 percent, compared with the 0.8 percent pace estimated in September, and little changed from a 0.2 percent expansion in the second quarter, because of a reluctance of consumers and businesses to spend, it said. The immediate effects of the earthquake reduced growth by 0.1 percentage point, it said.

“The pace of economic growth appears to have moderated, reflecting weak domestic demand and the constraining effects of the high New Zealand dollar,” the central bank said.

The so-called kiwi gained 5.7 percent against the U.S. dollar over the past 12 months, the second-best performance among the Group of 10 currencies, touching a 2 1/2-year high of 79.76 U.S. cents on Nov. 4.

The central bank also forecast the average three-month bank bill yield will be little changed until the second quarter, and expects it will rise to 3.8 percent by the end of 2011, less than the 4.1 percent projected in September.

Government reports yesterday showed construction and manufacturing shrank in the third quarter. Growth in the year ending March 31, 2012, will accelerate to 3.4 percent, faster than the previous 2.6 percent forecast, the central bank said.

“Repairs to earthquake damage are expected to add to GDP growth over the projection period,” Bollard said.

Quake Damage

More than 160,000 damage claims were received by the state-owned disaster insurer after the temblor. The Reserve Bank estimated the cost of the rebuilding will be at least NZ$5 billion ($3.8 billion) spread mainly over 2011 and 2012.

Bollard said the economic recovery will accelerate later in 2011, buoyed by rising export prices amid improving demand in markets such as the U.S., China and the U.K. Growth across the nation’s 16 largest trading partners is expected to be 3.8 percent in 2011, up from 3.5 percent projected in September, the central bank said.

In New Zealand, household spending “remains weak with household credit still flat and housing activity slowing further,” Bollard said. “House prices may decline a little further in the near term.”

House prices fell a second month in October, according to a report on Nov. 11 from the Real Estate Institute.

Consumer purchases on debit, credit and store cards rose 1.4 percent in November, Statistics New Zealand said today. Excluding fuel outlets, spending climbed 1 percent.

‘Tightening’ Demand

“We are witnessing a tightening of retail demand,” Warren Bell, chairman of New Zealand apparel retailer Hallenstein Glasson Holdings Ltd., told the company’s annual meeting in Christchurch on Dec. 7. “The opportunity to improve sales and margin on the existing business base is now far more challenging.”

Bollard’s focus is on keeping annual inflation within a range of 1 percent to 3 percent as the economy grows and government policies raise prices. An emissions-trading plan effective July 1 boosted fuel and electricity costs, and from Oct. 1 the sales tax was raised on all goods and services.

Bollard today forecast the consumer price index would rise 5 percent in the year ending June 30, 2011, from 1.7 percent a year earlier. That’s faster than the 4.8 percent pace he forecast three months ago.

By June 2012, inflation will have slowed to 2.1 percent, less than the 2.2 percent previously forecast, the bank said.

“As growth recovers, current spare capacity will gradually be used up, causing underlying inflation to pick up,” Bollard said. “The gradual removal of policy stimulus is expected to offset the accumulation of underlying inflation pressures.”

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