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Key Expects New Zealand Interest-Rate Cut, Sends Kiwi Lower

New Zealand's Prime Minister John Key
John Key, New Zealand's prime minister. Photographer: Qilai Shen/Bloomberg

New Zealand’s Prime Minister John Key expects the central bank to cut interest rates as the nation grapples with the aftermath of the deadliest earthquake in 80 years. The local currency slid to the lowest level this year.

“We’d certainly welcome it,” Key, 49, said in an interview in Wellington today. “The market has priced in a cut from the Reserve Bank. That would probably be my expectation, that the Reserve Bank would cut, but it’s for them to determine that.”

Key’s remarks were his most explicit on the outlook for borrowing costs since the Feb. 22 temblor devastated New Zealand’s second-largest city. The central bank has kept rates unchanged since July after two increases in the middle of last year, and a reduction would contrast with steps by counterparts around the world to check escalating inflation pressures.

“The RBNZ already has a very difficult decision to make and whether real or perceived, there’s now an additional layer of pressure,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. “He should be maintaining the appropriate distance between central bank decisions and the government.”

The Reserve Bank of New Zealand declined to comment on the prime minister’s remarks.

The New Zealand dollar fell 0.8 percent to 74.10 U.S. cents as of 4:59 p.m. in Wellington from 74.72 cents yesterday in New York.

‘Virtually No Growth’

A recession in the first half of 2011 cannot be ruled out, and there’s likely to be “virtually no growth” recorded in New Zealand for the financial year through June, Key said. He estimated the impact of the earthquake will reduce gross domestic product by about NZ$15 billion ($11 billion) and result in about NZ$5 billion less in tax revenue.

The 6.3-magnitude earthquake, which killed more than 150 people, is likely to slow an economy that already contracted in the third quarter of 2010. Christchurch’s second major temblor in six months, following a magnitude 7.0 quake on Sept. 4, wrecked its central business district. Both quakes may have caused as much as NZ$20 billion in damage, Key said this week.

The Reserve Bank of New Zealand’s next rate-setting meeting is scheduled for March 10. Four of eight economists surveyed by Bloomberg News predict the official cash rate will be lowered from 3 percent.

“Certainly they are going to have a period of where, like us, they’ll be looking at very flat growth,” Key said, referring to the central bank. Asked about a potential recession, he said “our hope would be that wouldn’t be the case.” He cited high New Zealand commodity prices as a potential factor in preventing a recession this year.

Earthquake Levy

About three-quarters of the estimated earthquake costs will be covered by the Earthquake Commission levy, reinsurance agreements and private insurance, according to Key. The government may have to pay NZ$5 billion to NZ$10 billion of the damage to infrastructure “over time,” Key said.

“The overall economic position isn’t dire in New Zealand by any stretch of the imagination, it’s just that the earthquake is a dominant factor,” Key said.

While the government wasn’t expecting a downgrade to New Zealand’s sovereign credit rating following the earthquake, the country’s high level of private-sector debt was a concern, Key said. New Zealand owed the equivalent of about 85 percent of its gross domestic product, most of it privately, he said.

“It will now be more difficult to get on top of that debt position from a government point of view, so that could put some pressure on the rating agencies, but we’re hopeful we can make enough adjustments to stave off a credit downgrade,” Key said.

Fund-raising Effort

Key is coordinating a global fund-raising appeal for the Christchurch earthquake and is seeking to raise “hundreds of millions” for its victims. The government was preparing to seek contributions from wealthy investors, banks and institutions around the world, he said.

New Zealand isn’t ruling out a separate levy to help repair Christchurch, Key said, calling that option “unlikely.”

Before last week’s temblor struck, New Zealand’s government expected that a budget deficit projected to be NZ$15.6 billion in the year ending June 30 would start to narrow, with a surplus targeted by 2015.

“It’s fair to say it makes it more challenging -- not impossible, but certainly more challenging,” Key said of the surplus goal.

Key graduated from the University of Canterbury in 1982 with a degree in commerce. He worked as an auditor before joining Elderbank in Wellington, the financial unit of agriculture company Elders Australia Ltd., becoming its head foreign-exchange trader.

He joined Merrill Lynch & Co. in Singapore in 1995, where he rose to become head of foreign exchange. He returned to New Zealand in 2001.

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