New Zealand’s central bank extended a period of record-low borrowing costs to nearly two years and signaled concern about rising house prices, sending the local dollar higher as investors raised bets on higher interest rates.
“House price inflation has increased and we are watching this and household credit growth closely,” Reserve Bank Governor Graeme Wheeler said in a statement today in Wellington after keeping the official cash rate at 2.5 percent. “The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.”
Wheeler indicated confidence the economy is poised to rebound, led by reconstruction from earthquakes that have rocked parts of the nation’s South Island in the past 2 1/2 years. The boost to domestic demand may lift labor costs and other prices, which have been contained by an 8 percent increase in the New Zealand dollar in the past two years.
“We expect economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 percent target midpoint,” Wheeler said in the statement.
Today’s rate decision was forecast by all 16 economists in a Bloomberg News survey. Seven predict a rate rise this year and nine see no change until 2014. The chance of a rate rise by September increased to 27 percent from 21 percent yesterday, according to swaps data compiled by Bloomberg.
“The Reserve Bank is getting increasingly worried about excess demand in the housing market,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “The excesses will build further. This will keep the central bank firmly on a tightening bias resulting in an increase in the cash rate later this year.”
New Zealand’s dollar bought 83.66 U.S. cents at 12:05 p.m. in Wellington compared with 83.21 cents immediately before the statement. The so-called kiwi rose 6.6 percent last year against its U.S. counterpart.
“The high currency is directly suppressing inflation on traded goods and is undermining profitability in export and import competing industries,” Wheeler said. “Inflation remains subdued” and “this mainly reflects the impact of the overvalued New Zealand dollar.”
Wheeler’s annual inflation target is the middle of a 1 percent to 3 percent range.
Limiting the expansion, the labor market is weak and the government spending cuts to achieve a budget surplus are curbing demand, he said.
New Zealand’s unemployment rate rose to 7.3 percent in the third quarter of 2012, the highest level since 1999.
The central bank has left the benchmark borrowing cost unchanged since March 2011 to allow the economy to recover after the nation’s deadliest quake in 80 years. The February 2011 temblor struck Christchurch, New Zealand’s third-largest city, and the surrounding Canterbury province, killing 185 people and closing the central city.
Low rates are fueling demand for dwellings. New Zealand house prices increased 5.7 percent last year, Quotable Value New Zealand Ltd., the government valuation agency, said Jan. 10.
Gross domestic product increased 0.2 percent in the three months through September, the weakest expansion since the fourth quarter of 2010, according to a government report last month. Consumer prices fell in the fourth quarter from the July-September period and rose 0.9 percent in the year through December, a Jan. 18 report showed.
“Recent data on business confidence and construction activity suggest GDP growth is recovering from the softness seen through the middle of last year,” Wheeler said. “The Canterbury rebuild is gathering momentum and its impact will be felt more broadly in incomes and domestic demand.”
Construction expanded the most in 10 years in the third quarter, boosted by rebuilding in Christchurch. Construction costs rose 10 percent in the city and the surrounding Canterbury region in the year ended Dec. 31, compared with the 3.1 percent pace across the whole country.
Fletcher Building Ltd., the nation’s biggest supplier of construction materials, is the third-best performer this year on the benchmark NZX 50 stock index, gaining 11 percent amid predictions of rising earnings from earthquake-related work.