N.Z.’s Wheeler May Resist Rate-Cut Calls in First Policy Meeting

Reserve Bank of New Zealand Governor Graeme Wheeler
Graeme Wheeler, governor of the Reserve Bank of New Zealand. Photographer: Tomohiro Ohsumi/Bloomberg

New Zealand central bank Governor Graeme Wheeler will probably resist pressure from unions and exporters to counter a rising currency by cutting interest rates in his first policy decision.

All 17 economists surveyed by Bloomberg News predict Wheeler will leave the official cash rate at 2.5 percent tomorrow in Wellington, prolonging a period of record-low borrowing costs that began in March 2011. There is a 92 percent chance of no change, according to swaps data compiled by Bloomberg, and the New Zealand Institute of Economic Research Inc.’s shadow board also sees Wheeler extending the pause.

The Council of Trade Unions wants the new governor, a former World Bank official who started on the job a month ago, to respond to the slowest inflation in more than a decade by reducing the benchmark rate, saying that will curb demand for New Zealand’s currency and make exports more affordable. Weakening the argument for a cut are signs of a stronger housing market and prospects for inflation to rise even as the economy struggles to accelerate.

“A good case for an easing can be made,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland and a former Treasury and Reserve Bank of New Zealand economist. Still, “the economic case for easing policy further is not watertight at this stage, especially as he will likely be concerned not to further stoke price pressures in the housing market.”

Stronger Kiwi

New Zealand’s dollar has gained 5.1 percent this year, the second-best performer among Group of 10 currencies.

Rio Tinto Ltd. last month said it planned to cut 100 jobs at its New Zealand aluminum smelter, citing conditions that include a rising exchange rate.

“We need the Reserve Bank to do what it can to give exporters a break,” said Kim Campbell, chief executive of the Employers and Manufacturers Association in Auckland, in a statement this month.

Consumer confidence fell to a three month-low in October, and businesses reported weaker hiring in the third quarter. Gross domestic product will expand 1.1 percent in the six months through December from a 1.6 percent pace in the first half, according to a Bloomberg survey of nine economists.

“With the economy stagnating, the Reserve Bank should be loosening monetary conditions,” according to an Oct. 16 statement from Bill Rosenberg, an economist at the CTU, the umbrella group for the nation’s biggest trade organizations.

Low Inflation

Adding to the case for lower borrowing costs, consumer prices rose 0.8 percent in the third quarter from a year earlier, below the 1 percent to 3 percent range the central bank is required to target and the slowest rate since 1999.

Still, inflation is forecast to average 2.4 percent next year as demand for capital and labor from the rebuilding of earthquake-damaged Christchurch increases, according to the economists’ survey. A series of temblors struck the country’s third-biggest city since 2010, including a February 2011 quake that killed 185 and destroyed the city center.

The outlook for inflation and rising house prices are main reasons that economists expect Wheeler’s next move will be to raise rates. Eleven of 17 economists forecast the cash rate will stay unchanged until at least July. Five expect an increase in the first half and one expects a quarter-point cut in June.

House prices in September rose 5.3 percent from a year earlier, the fastest annual gain since May 2010, according to Quotable Value New Zealand.

Sole Decider

Wheeler, 60, succeeded Alan Bollard on Sept. 26. Under New Zealand law, the central bank governor alone makes the decision on interest rates after taking advice from a staff panel that doesn’t vote and doesn’t publish its minutes.

Before starting, he signed an agreement with Finance Minister Bill English that included a requirement to focus on keeping annual price changes near 2 percent to help anchor inflation expectations.

He has made no other public statements and that, along with a 15-year absence from New Zealand, makes his approach to monetary policy hard to gauge, economists said.

“The big unknown is how the new governor’s attitude will vary from his predecessor’s,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “He may interpret the current economic situation differently.”

Wheeler spent 13 years at the World Bank, culminating in a four-year period as co-managing director when he led its engagement with the Group of 20, Group of Seven and the International Monetary Fund.

Wolfowitz Saga

In May 2007, World Bank President Paul Wolfowitz quit amid a furor over a pay raise he helped arranged for his companion. Wheeler confronted Wolfowitz at a managers’ meeting a month earlier, saying his refusal to step down would damage the lender’s reputation, the New York Times reported.

Prior to the World Bank, Wheeler’s career was centered on New Zealand’s Treasury Department. He worked as a Treasury adviser until 1984, when he joined New Zealand’s Paris-based delegation to the Organization for Economic Cooperation and Development.

He returned to the Treasury in Wellington in 1990, serving as director of macroeconomic policy and in other positions before joining the World Bank in 1997.

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