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RBNZ Signals Rate Pause May Be Extended on Currency Strength

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

New Zealand’s central bank left interest rates at a record low, citing benign inflation, and signaled that the rising currency may delay an increase in borrowing costs.

“The New Zealand dollar has stayed elevated despite recent falls in commodity prices,” Governor Alan Bollard said in a statement in Wellington today. “For now, it is appropriate for the official cash rate to remain at 2.5 percent. Should the exchange rate remain strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings.”

Investors are betting the central bank won’t raise rates until next year because annual inflation is slower than the midpoint of its 1 percent to 3 percent target range. The local dollar’s 4.9 percent gain this year, the second-best performer of 16 currencies tracked by Bloomberg, is making imports cheaper while returns from commodity exports are declining as prices fall.

“A persistently higher exchange rate with all other things constant would imply interest rates either on hold for longer or even lower for the same inflation outcome,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. He expects no change in rates until March.

New Zealand’s dollar rose after Bollard’s comments. It bought 81.47 U.S. cents at 11:25 a.m. in Wellington from 81.34 cents immediately before the statement. Traders interpreted the phrase “for now” as suggesting the cash rate may rise sooner, said Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities Inc.

Inflation ‘Restrained’

The chance of a quarter-point rate cut by September rose to 44 percent today from 12 percent on April 24, according to swaps prices from Westpac Banking Corp. New Zealand markets were closed yesterday.

“Inflation is restrained and is expected to stay near the middle of the bank’s target range,” Bollard said. Consumer prices rose 1.6 percent in the year through March, less than Bollard forecast last month.

Bollard has left the cash rate unchanged since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years in Christchurch, its second-largest city, and the surrounding Canterbury province.

Today’s decision was forecast by all 16 economists in a Bloomberg News survey. Two economists forecast a rate increase before Sept. 30 and 11 pick an increase by the end of the year. Five project no change until 2013.

Economic Growth

New Zealand’s economic growth slowed more than economists predicted in the fourth quarter, expanding 0.3 percent after a 0.7 percent advance in the July-September period, a government report showed March 22. That was half the 0.6 percent median projection for growth in a Bloomberg survey of 16 economists.

Growth in the 12 months through Dec. 31 was 1.8 percent, matching the third-quarter pace, the report showed. Bollard last month forecast the economy will grow 3.1 percent in the year ending March 31, 2013.

“The domestic economy is showing signs of recovery,” Bollard said today. “Housing market activity continues to increase and a recovery in building activity appears to be under way as forecast. That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year.”

New Zealand’s recovery has been slow amid concerns over weak global demand for exports, which make up 30 percent of the economy. Milk powder prices fell to their lowest level since 2009 at an auction last week, according to Auckland-based Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter.

Milk Payments

Fonterra last month lowered its forecast milk payment to farmer suppliers, citing falling prices and currency gains.

Still, business confidence rose to a seven-month high in March, according to a survey of 421 firms by ANZ National Bank Ltd. Confidence was led higher by the construction industry, which rose to a 23-month high, ANZ said.

House sales in March recorded the best monthly result since November 2007, the Real Estate Institute said April 16. Prices rose 1.9 percent from February, the report showed.

Unlike counterparts in Australia and elsewhere in Asia, Bollard hasn’t responded to weak global demand by cutting borrowing costs because he expects earthquake rebuilding will stoke inflation in coming years.

India’s central bank on April 17 cut rates for the first time since 2009 to bolster growth. Investors this week raised bets the Reserve Bank of Australia will cut its benchmark interest rate from 4.25 percent next month after a gauge of core consumer prices rose at the slowest pace since 1998.

The Federal Reserve is ready to take additional action if needed to boost the U.S. economy, Chairman Ben S. Bernanke said yesterday.

“The global outlook remains of concern,” Bollard said today. “Near-term indicators have moderated and financial market sentiment is still fragile.”

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