New Zealand Signals Rates May Stay at Record Low

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

New Zealand’s central bank signaled it may keep interest rates at a record low for another year, extending a 15-month pause as weaker domestic growth eases inflation and Europe’s fiscal crisis clouds the outlook.

“Our forecast for 90-day interest rates is consistent with not having to push the OCR up for some time,” Reserve Bank of New Zealand Governor Alan Bollard said at a news conference in Wellington today after earlier keeping the official cash rate at 2.5 percent. The central bank cut its forecasts for economic growth in the next three years, citing falling commodity prices and spending restraint.

The RBNZ’s next step may depend on what happens in Europe, where a Greek election June 17 will influence whether it exits the euro, causing greater financial-market turmoil. The New Zealand dollar rose after today’s language lacked any specific signal Bollard will cut borrowing costs, even as interest-rate swaps reflect a 64 percent chance of a cut by September.

“If you were to see a real euro-zone meltdown, that’s going to be reflected through in our forecasts,” Bollard told reporters. “Absolutely that would be a core issue we would be thinking about in terms of monetary policy.”

New Zealand’s dollar bought 77.79 U.S. cents at 4:31 p.m. in Wellington compared with 77.30 cents immediately before the statement. There was a 20 percent chance of a rate cut late yesterday, according to interest-rate swaps data compiled by Bloomberg. Today’s decision was forecast by all 16 economists in a Bloomberg News survey.

Bollard’s Exit

Bollard, 61, has announced he won’t seek to extend his term as governor beyond late September, and said today the Sept. 13 policy decision will be his last.

The central bank forecasts the three-month bank bill yield will be 2.7 percent in the first quarter next year, down from 3.1 percent in its March projections, according to the monetary policy statement also published today. The forecasts are seen as a guide to the direction of the cash rate.

The yield will rise to 3.1 percent by the fourth quarter of 2013, and 3.3 percent a year later, the RBNZ said.

Fourteen of the economists surveyed by Bloomberg forecast no change in the cash rate until 2013. Two predicted a quarter-point rate rise in December.

“We see little reason to disagree with an outlook that has the RBNZ on hold until some time in 2013, unless the worst case does occur in Europe in which case the RBNZ will be easing policy,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.

Quake Damage

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, which killed 185 people and closed the central city.

Unlike counterparts in Australia and China, Bollard hasn’t cut borrowing costs because quake rebuilding is expected to boost growth and stoke inflation in coming years. Still, the recovery has been slow amid concern that Europe’s debt crisis would spill over into weak global demand for exports, which make up 30 percent of New Zealand’s economy.

The central bank sees a 60 percent chance of a “muddle-through” scenario in Europe, which comprises small crises and no definite exit from the euro, Bollard told a parliamentary committee today. The RBNZ sees a 30 percent chance of a Greek exit and a 10 percent chance of contagion into more important peripheral countries such as Spain and Italy, he said.

Worst-Case Scenario

Elaborating on the contagion scenario, Bollard said “obviously the official cash rate can be cut.”

“We’re in the reasonably comfortable position where we can do that but we’re not planning to do that at the minute,” he said.

Australia’s central bank on June 5 cut its overnight cash rate target to 3.5 percent, the lowest since 2009, on concern about Europe’s fiscal problems and slowing Chinese growth. China also last week reduced borrowing costs for the first time since 2008.

New Zealand’s economy is growing at a slower pace than previously projected, reflecting falling commodity prices and modest household consumption, Bollard said. The fall in export incomes will weigh on economic activity even as the currency falls, he said. The local dollar has slumped 5.4 percent this quarter after a 5.3 percent gain in the first quarter.

Currency’s Strength

The currency is still “quite highly valued given New Zealand’s competitiveness, but it’s certainly a bit more of a comfortable position than it was in March,” he told the committee. There isn’t much the central bank can do to lower the exchange rate when it is mainly being influenced by “distortions” in the international environment, he said.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, last month said it will pay its New Zealand farmers less for their milk as global prices moderate.

The economy will probably grow 2 percent in the year ending March 31, 2013, down from 3.1 percent predicted in the March policy statement, the RBNZ said.

Growth will improve to 3 percent in the 12 months through March 2014, slower than the 3.7 percent pace projected in March, it said. The main impetus to the expansion is coming from residential investment and the Christchurch rebuilding, the central bank said. Growth is forecast to slow to 1.6 percent in the year through March 2015.

Inflation in the year through June will slow to 1.1 percent and accelerate thereafter, the RBNZ forecast. It will reach the midpoint of the 1 percent to 3 percent range that Bollard is required to target by mid-2013, a year earlier than previously projected, after the government announced new tobacco taxes.

“Current spare capacity in the economy will be absorbed as domestic activity increases, leading to some inflationary pressures,” the RBNZ said. “The removal of some monetary stimulus will offset this.”

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