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New Zealand’s Bollard May Extend Six-Month Interest-Rate Pause

Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg
Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg

Jan. 25 (Bloomberg) -- New Zealand’s central bank will probably delay raising borrowing costs for a fourth straight policy meeting to revive an economy growing at the slowest pace in the Asia-Pacific region.

Reserve Bank of New Zealand Governor Alan Bollard will leave the official cash rate at 3 percent at 9 a.m. on Jan. 27 in Wellington, according to all 12 economists surveyed by Bloomberg News. Five analysts predict an increase in June and seven forecast a move in the third quarter, the survey showed.

An earthquake that rocked the Christchurch region contributed to a contraction in New Zealand’s economy in the third quarter, forcing Bollard to hold rates while other Asia-Pacific nations raised borrowing costs. His six-month rate pause has helped make New Zealand’s currency the third-worst performer this year among 16 major currencies tracked by Bloomberg.

“The Reserve Bank’s near-term focus will remain on ensuring the robustness of the economic recovery,” said Philip Borkin, economist at Goldman Sachs & Partners New Zealand Ltd. in Auckland. “While evidence is tentatively beginning to point to a rebuilding in economic momentum, there is still little to justify rate hikes in the imminent future.”

There is a zero probability of a rate rise this week, with a quarter-point increase not priced by the interest-rate swaps market until July, according to ANZ National Bank Ltd.

Bollard has kept the benchmark rate at 3 percent since July last year amid a slump in house sales and consumer spending.


Gross domestic product fell 0.2 percent in the three months through September, according to a government report on Dec. 23. From a year earlier, GDP rose 1.5 percent in the third quarter, the smallest annual increase of 17 Asia-Pacific economists tracked by Bloomberg News.

The economy likely expanded 0.2 percent in the period October through December, enabling New Zealand to avoid a recession, said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.

Given the outlook, Gibbs said that Bollard is likely to reiterate his Dec. 9 view that it would be “prudent to keep the cash rate low until the recovery becomes more robust.”

Bollard last month lowered his 2011 growth forecast to 2.5 percent from 3.8 percent. Still, rebuilding after the magnitude 7 earthquake that damaged Christchurch city and surrounding districts in September, and continued demand for the nation’s exports will buoy demand, he said.

Economists also expect a boost to tourism and consumer spending when New Zealand hosts the Rugby World Cup in September and October this year.

Commodity Prices

Among the evidence for a recovery in growth, commodity export prices rose 23 percent last year to a record, according an ANZ National index. After adjusting for the New Zealand dollar’s 7.2 percent gain against the U.S. currency, prices rose 16 percent, boosting the incomes of farmers and manufacturers.

Last month, Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its forecast payment to New Zealand milk suppliers by 4.5 percent, citing higher international prices.

New Zealand also faces below-average river levels and soil-moisture readings over the next two months, prolonging dry conditions that have curbed milk output, the National Institute of Water and Atmospheric Research said on Jan. 11.

Reports last week showed the manufacturing industry expanded for a third month, and consumer confidence rose to a seven-month high.

Housing Falls

Still, house prices in December dropped 1.6 percent from a year earlier, according to Real Estate Institute figures published Jan. 18. Retail sales excluding fuel and vehicles, a measure of core consumer spending, declined for a second month in November, Statistics New Zealand said on Jan. 21.

Warehouse Group Ltd., the nation’s largest discount retailer, on Jan. 5 forecast a decline in first-half profit after sales in the two months ended Jan. 2 fell 2.7 percent from a year earlier.

“Retail sales in general have been very soft” from mid-December to Jan. 2, Chief Executive Officer Ian Morrice said in a statement sent to the stock exchange. “Consumers clearly remain even more focused than we predicted on strengthening household balance sheets.”

Weaker consumer demand is helping keep underlying inflation in check. Bollard is required to keep annual inflation between 1 percent and 3 percent.

While prices rose 4 percent in 2010, about half of that increase was driven by an Oct. 1 rise in the nation’s sales tax, and there also was a jump in tobacco tax and a rise in energy prices after introduction of an emissions trading plan. Excluding the one-time items, prices probably rose 1.5 percent last year, according to Gibbs of Deutsche Bank.

For news and related information: Stories on interest rates {NZOCR <Index> CN <GO>} Reports on Alan Bollard {NSE ALAN BOLLARD ZEALAND <GO>} Stories on New Zealand economy {NZNTGDPC <Index> CN <GO>} Top New Zealand stories {TOP AU <GO>}

To contact the reporters on this story: Tracy Withers in Wellington at; Daniel Petrie in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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