RBNZ Says Kiwi Gains May Provide Scope to Delay Rate Rises
New Zealand’s central bank said continued gains by the nation’s currency may give it scope to delay interest-rate increases that will likely be needed next year to combat faster inflation.
“Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR,” Governor Graeme Wheeler said in a statement released in Wellington today after leaving the official cash rate at 2.5 percent, a record low.
New Zealand may become one of the first developed nations to begin raising borrowing costs amid expectations inflation will accelerate toward the middle of the 1 percent to 3 percent range the RBNZ targets. While the kiwi dollar’s gains make imports cheaper, rising domestic demand fanned by a housing boom adds to signs a rate rise may come as early as March.
“Imported inflation may remain subdued but domestic price pressures are building,” Annette Beacher, the head of Asia-Pacific research at TD Securities in Singapore, said in an e-mailed note. “This balancing act, along with the spillover of the booming housing market into broader demand and cost pressures, are what will drive the RBNZ to tread carefully next year.”
New Zealand’s currency rose after the statement because Wheeler didn’t express fresh concern about the kiwi’s recent gains, which saw it rise to a five-month high last week, Beacher said. The currency bought 82.68 U.S. cents at 10:35 a.m. in Wellington, from 82.32 cents immediately ahead of the RBNZ decision. It reached 85.44 cents on Oct. 22, the highest since mid-May.
The exchange rate “remains high and is a headwind to the traded goods sector,” Wheeler said in today’s statement.
All 15 economists in a Bloomberg News survey last week predicted today’s decision. None forecast a rate rise before March, when 12 expected a quarter-point increase. The RBNZ has held borrowing costs at 2.5 percent since March 2011.
Westpac Banking Corp. economists today changed their forecast for the first rate rise to April from March, citing an “uncomfortably high” currency.
“Although we expect to keep the OCR unchanged in 2013, increases will likely be required next year,” Wheeler said today, reiterating comments made last month. “The extent and timing of the rise in the policy rate will depend largely on the degree to which momentum in the housing market and construction sector spills over into broader demand and inflation pressures.”
In September, the RBNZ forecast annual inflation will accelerate to 1.9 percent by late 2014. Consumer prices rose 1.4 percent in the 12 months through September, the fastest pace in 18 months.
“As demand pressure picks up, headline inflation is likely to rise toward the 2 percent target midpoint,” Wheeler said. The statement contained no new forecasts.
Household spending is increasing and there is a pick-up in construction that will support economic activity and start to ease the housing shortage, Wheeler said.
House prices surged 9.8 percent in September from a year earlier, according to Real Estate Institute figures. The RBNZ doesn’t want continued high house-price inflation to “compromise financial or price stability,” Wheeler said.
The RBNZ introduced limits on low-deposit home lending from Oct. 1. Loans for more than 80 percent of a property’s value must account for no more than 10 percent of a bank’s new lending, down from about 30 percent prior to the restrictions being announced.
“Recently introduced restrictions on high loan-to-value mortgage lending are expected to help slow house price inflation and the bank will continue to monitor the situation closely,” Wheeler said.
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