July 10 (Bloomberg) -- New Zealand Finance Minister Bill English said the country’s central bank will have to raise interest rates eventually, even if that risks driving up the local dollar.
“New Zealanders think they are going to have 5 percent rates forever,” English said at an event in Wellington today, referring to the current level of mortgage lending rates. “Well they aren’t. They are going to go up, it’s just a matter of when.” The kiwi rose after the comments, climbing about a quarter of a U.S. cent to as high as 78.73 cents, before sliding after China reported an unexpected drop in June exports.
The Reserve Bank of New Zealand has refrained from raising its benchmark rate from a record-low 2.5 percent to tackle a housing boom partly because of concerns that may reignite interest in the kiwi dollar. While the currency has dropped about 9 percent against the greenback in the past three months, its strength in recent years has hurt New Zealand’s exporters and curbed economic growth.
English today voiced concern about New Zealand raising rates before other nations, saying this could push up the dollar and undermine an economic recovery that’s gaining momentum.
“One of the risks to New Zealand is being the first developed country to lift interest rates,” he said. With low rates elsewhere, investors would be attracted to a higher yield “and we’d end up with an exchange rate going too high,” he said.
While the central bank has signaled it doesn’t intend to increase borrowing costs until the second half of next year, many economists say it will be forced to act sooner as house prices soar and the economy picks up. Business optimism neared a four-year high in the second quarter, with firms saying they were more likely to invest and hire workers, according to a New Zealand Institute of Economic Research Inc. survey published yesterday.
“A number of recent indicators confirm the economy is on the right track and the future is looking brighter,” English said earlier today in a speech. “We are seeing momentum building towards a stronger, more stable economy.”
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