Bollard Alters New Zealand Policy Language to Gain `Wriggle Room' on Rate
New Zealand’s central bank Governor Alan Bollard has given himself “wriggle room” to delay raising the benchmark interest rate until July, economists said.
Bollard yesterday said he expects to raise the official cash rate from a record-low 2.5 percent “over coming months” provided the economy strengthens as he has forecast. The wording changed from an earlier pledge to increase borrowing costs “around the middle of 2010.”
Highlighting the flexibility in the language, economists and traders took opposing stances on the outlook for borrowing costs. Nine of 12 economists surveyed by Bloomberg News expect an increase at the next review on June 10, with three tipping the third quarter. Currency traders pushed the New Zealand dollar lower yesterday as they bet on a later adjustment.
The statement “gives the Reserve Bank enough wriggle room to begin hiking at either the June statement or July review depending on how the data evolves and the global backdrop,” said Su-Lin Ong, a senior economist at RBC Capital Markets in Sydney. She expects a June increase.
New Zealand’s dollar fell as low as 71.52 U.S. cents yesterday from 72.09 cents immediately before Bollard’s statement. It bought 72.36 cents at 12.20 p.m. in Wellington, rebounding against a weaker U.S. dollar amid signs Greek officials will reach agreement on a potential bailout.
Bollard’s seven-paragraph statement was both upbeat and cautious on the outlook for global and domestic demand.
“Trading partner activity has recovered more quickly than we expected,” the governor said. Growth in Asia has been “particularly strong” and prices for commodity exports are near record highs, he said.
Still, “risks to the global outlook remain elevated,” Bollard said, without providing details.
Credit-rating cuts on Greece, Portugal and Spain this week are spurring investors’ concern that the European deficit crisis is spreading.
“A significant escalation of the sovereign debt worries currently seen in Europe would seem the most likely obstacle to a hike in June,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.
New Zealand’s economy is recovering “in line with or slightly faster” than the pace the central bank forecast in March, Bollard said yesterday. Still “households remain cautious” and business spending is weak, he said.
Bollard’s outlook has got “some heavy conditionality,” said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. “The March forecasts were for growth of 1 percent a quarter. To be hitting that, we’ve got to be going pretty well.”
Bagrie expects Bollard will start raising the rate in June because he will have a fresh set of forecasts from his officials and a better sense of how the economy began the year. Reports on first-quarter employment, retail spending and construction will be available by then.
ANZ National’s survey of business sentiment, published on April 28, showed that company expectations for sale and profits were near an 11-year high and consistent with the economy growing by more than 4 percent in the next 12 months. The economy is close to a turning point, Bagrie said.
“At some stage the stars are going to get in alignment and that stage is not too far away,” he said. “The Reserve Bank’s very mindful of that.”
By moving in June, Bollard can also afford to be less aggressive with his increases, said Bagrie, who expects the cash rate will rise to 3.5 percent by October and then will be unchanged for the rest of the year.
Bollard yesterday reiterated that he may not have to raise borrowing costs as much in this economic cycle as he has in the past because bank lending rates are much higher than the cash rate, which helps damp demand.
Bollard has kept borrowing costs unchanged since April 2009 to help steer the economy out of its worst recession in three decades.
Finance Minister Bill English last week said the recovery was “quite patchy” and the government isn’t expecting a significant increase in revenue that will help narrow its budget deficit. The budget on May 20 will continue a pattern of tight control over government spending, he said.
Recent reports have pointed to weaker-than-expected domestic demand, prompting investors to reduce bets of an April rate rise. Retail sales fell for the second time in three months in February, according to government figures on April 14. Home- building approvals fell for the third time in four months in March, Statistics New Zealand said today.
For economists, the key gauge may be employment. A report on May 6 will show whether the jobless rate has retreated from a 10-year high of 7.3 percent in the fourth quarter.
“If I see the employment report as being really disappointing then I suspect myself and others will push it out to July,” said Annette Beacher, senior strategist at TD Securities Inc in Singapore. “That’s where the risk lies.”
To contact the reporter on this story: Tracy Withers in Wellington at firstname.lastname@example.org