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N.Z.’s Central Bank to Extend Rate Pause to 2014, NZIER Predicts

New Zealand’s central bank will keep the official cash rate at a record-low 2.5 percent next year even if food and fuel prices surge, the New Zealand Institute of Economic Research said.

“The economy is slow, there is little inflation and global risks are high,” Shamubeel Eaqub, principal economist at the Wellington-based organization, said in a report today. “The Reserve Bank will look through a current spike in global food and fuel prices as they are transitory. Interest rates will be on hold until 2014.”

Commodity prices are rising amid a U.S. drought that has curbed production, and the consequences might be higher prices for dairy, meat and grocery products in New Zealand stores early next year, Eaqub said. The central bank is allowed to ignore the short-term boost to inflation and hold rates until broader price pressures emerge, he said.

New Zealand’s economy will grow 1.7 percent this year and 2.7 percent in 2013 as reconstruction of earthquake-damaged Christchurch and the surrounding province of Canterbury accelerates, NZIER predicted. The outlook for next year is little changed from a 2.5 percent forecast in May.

“Domestic growth is steady but unspectacular,” Eaqub said. Households and the government are spending cautiously and paying off debt, which is making for a “tough time” for builders and retailers, he said.

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