N.Z. Holds Rate at Record Low on EU Risks, Tame Inflation

New Zealand’s central bank extended a pause in the nation’s benchmark interest rate, citing risks from Europe’s fiscal crisis and an outlook for tame inflation in holding borrowing costs at a record low.

The decision to keep the official cash rate at 2.5 percent for an 11th straight meeting, spanning almost 17 months, was forecast by all 16 economists in a Bloomberg News survey. The Reserve Bank of New Zealand’s last change in borrowing costs was a cut in March 2011.

“New Zealand’s trading partner outlook remains poor, with several euro-area economies in recession,” Governor Alan Bollard said in a statement in Wellington. “There remains a limited risk that conditions in the euro area deteriorate very significantly.”

The domestic economy should “grow modestly over the next few years,” Bollard said, with the rebuilding of earthquake-hit Christchurch expected to boost the construction industry. Fiscal consolidation and a strong exchange rate were offsetting that by constraining demand, he said.

New Zealand’s dollar strengthened after Bollard’s comments. It bought 79.10 U.S. cents at 10:16 a.m. in Wellington from 78.90 cents immediately before the statement. The so-called kiwi has gained 1.8 percent this year, the best performer among the Group of 10 currencies tracked by Bloomberg.

Inflation Target

While annual inflation is at the bottom of the 1 percent to 3 percent range the governor is required to target, it should settle near the middle of that range over the medium term, Bollard said today. The nation’s consumer prices recorded the slowest annual inflation since 1999 last quarter, while a July survey showed business confidence fell in that period.

After today’s announcement, investors reduced bets New Zealand will cut rates this year. Traders are pricing in a 32 percent chance the RBNZ will lower the benchmark by a quarter percentage point to 2.25 percent in September, down from 44 percent yesterday, according to swaps data from Westpac Banking Corp.

In a research note, Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland, said “the RBNZ remains relaxed on the inflation front” and “March is still the earliest we see” an increase in the cash rate.

Rate Predictions

In a Bloomberg survey of economists published July 23, all 16 respondents predicted New Zealand’s benchmark rate will stay unchanged for the rest of this year, and nine of those polled forecast an increase in the first quarter of 2013.

“Our view for some time has been that the RBNZ would remain sidelined until 2014 and today’s statement leaves us comfortable with that profile,” Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney, wrote in an e-mailed note.

Bollard has left the benchmark rate unchanged since March last year to allow the economy to recover after the nation’s deadliest quake in 80 years struck Christchurch, its second-largest city. The temblor, in February 2011, killed 185 people and closed the central city.

The government last month appointed former World Bank official Graeme Wheeler to succeed Bollard, who has served in the position for a decade and whose term ends Sept. 25.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE