N.Z. Holds Benchmark Rate at 2.5% as Wheeler Term Begins

New Zealand Reserve Bank Governor Graeme Wheeler
Graeme Wheeler, governor of the Reserve Bank of New Zealaind. Photographer: Lakruwan Wanniarachchi/AFP/Getty Images

New Zealand’s new central bank chief extended a period of record-low borrowing costs as a stronger housing market offset a fragile global economy, boosting the currency as traders pared bets on interest-rate cuts.

“For now it remains appropriate for the official cash rate to be held at 2.5 percent,” Reserve Bank Governor Graeme Wheeler said in a statement today after a meeting in Wellington. The decision was the first for the former World Bank official who took over from Alan Bollard in late September.

Slowing global growth is hurting demand for New Zealand’s exports, which make up about 30 percent of country’s gross domestic product. Sluggish domestic demand and the strongest Group of 10 currency this year have pushed inflation below the central bank’s 1 percent to 3 percent target range.

“The high New Zealand dollar is undermining export earnings and encouraging substitution toward imported goods and services,” Wheeler said. “GDP continues to expand at a modest pace. Housing market activity is increasing as expected and repairs and reconstruction in Canterbury are boosting the construction sector.”

Today’s decision was forecast by all 17 economists in a Bloomberg News survey. New Zealand’s dollar rose as traders reduced wagers on a rate cut. It bought 81.97 U.S. cents at 10:33 a.m. in Wellington compared with 81.51 cents immediately before the statement.

Rate-Cut Calls

The chance of a rate cut by March fell to 57 percent from 71 percent yesterday, according to interest-rate swaps data compiled by Bloomberg.

“The doves are left empty handed,” Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore, said in a research note after the decision. “The hurdles for easing are even higher.”

Wheeler resisted pressure to counter the New Zealand dollar’s 5.5 percent gain this year by cutting borrowing costs today. Calls for easier monetary policy mounted after the consumer price index rose 0.8 percent in the 12 months through September, the slowest pace since 1999.

“The bank continues to expect inflation to head back toward the middle of the target range,” Wheeler said, adding he will be watching gauges of inflation expectations and pricing intentions closely.

Inflation is forecast to average 2.4 percent next year amid rising demand for capital and labor from the rebuilding in Christchurch and the surrounding Canterbury region, according to a Bloomberg survey of nine economists this month.

Inflation Focus

“The focus is firmly on medium-term inflation,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland, adding that Wheeler “doesn’t seem fazed by the latest blip in the CPI.”

A series of temblors struck the country’s third-biggest city since 2010, including a February 2011 quake that killed 185 people and destroyed the city center.

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.

“The global economy remains fragile with further improvement heavily dependent on policy implementation,” Wheeler said. “That said, market sentiment has improved from earlier in the year suggesting the risks to the global outlook are more balanced.”

Global Outlook

The International Monetary Fund this month cut its global growth forecasts as the euro area’s debt crisis intensifies, and said it saw “alarmingly high” risks of a steeper slowdown.

The Federal Reserve yesterday said the U.S. is still growing modestly and repeated that interest rates are likely to stay near zero “at least through mid-2015.” Policy makers in Australia cut borrowing costs this month, and most economists surveyed by Bloomberg expect another cut in November.

New Zealand’s push toward a budget surplus is constraining demand growth, Wheeler said.

Wheeler, 60, succeeded Bollard on Sept. 26, returning to New Zealand after 15 years that included being co-managing director of the World Bank from 2006 to 2010. 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.

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