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N.Z. Dollar Gains to Keep Lid on Inflation, Researcher Says

New Zealand’s dollar, the best performing major currency in the past three months against the U.S. dollar, is likely to stay high and help limit price gains, according to the New Zealand Institute of Economic Research.

“We expect the New Zealand dollar to remain elevated for some time,” said Shamubeel Eaqub, principal economist at the Wellington-based nonprofit research group. “A high dollar is helping to keep a lid on inflation for now.”

The currency surged to a record yesterday and has advanced 11 percent since early March on speculation interest rates may need to rise after a report showed business confidence this month at a 12-month high. Improving prospects may embolden companies to raise prices just as rebuilding from the nation’s deadliest earthquake in 80 years starts to fan inflation next year, Eaqub said.

“As the economy starts to pick up, some of these pent-up cost pressures are likely come through in terms of higher prices,” Eaqub told a briefing in Wellington. “This has implications for the Reserve Bank. By the early part of next year they will have to start raising interest rates.”

The official cash rate is at a record-low 2.5 percent. There is a 40 percent chance that central bank Governor Alan Bollard will raise the cash rate by a quarter-point in October and a 96 percent chance of a move in December, according to swaps prices as at 2:50 p.m. in Wellington.

Inflation Outlook

By early 2012 there may be “some convincing evidence the economy is coming together” and that inflation is emerging, Eaqub said. A rate rise this year is unlikely because the performance of the economy will still be “quite mixed,” he said.

The institute forecasts economic growth will be 0.3 percent this year before accelerating to 3.7 percent in 2012 as reconstruction gets under way in the southern city of Christchurch, where a magnitude-6.3 earthquake on Feb. 22 killed more than 180 people and shut the central business district.

Growth this year is being hampered by sluggish home sales, falling immigration and weak business lending, Eaqub said. There are signs of improving property sales and company spending which will help underlying growth next year, he said.

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