Wheeler Says Returning to Surplus Should Be N.Z. Priority

New Zealand’s central bank chief urged the government to stay on course for a budget surplus to help underpin economic growth and indicated he won’t hurry decisions on interest rates, sending the local dollar higher.

Speaking today in Christchurch, the South Island city rocked by earthquakes in the past 2 1/2 years, Reserve Bank Governor Graeme Wheeler said the country’s fiscal deficits and appetite for debt mean interest rates need to be higher than they would need to be elsewhere.

Failure to narrow the country’s budget shortfall “means monetary policy has to be tighter and interest rates higher than otherwise,” he said in his prepared remarks. “The high propensity of New Zealanders to borrow means that higher interest rates than elsewhere are required to achieve similar inflation outcomes.”

The so-called kiwi jumped to 84.40 U.S. cents, the highest since Jan. 24, before trading at 84.17 cents at 3:36 p.m. in Wellington. Wheeler, a native New Zealander, took office about four months ago after serving as a World Bank official in Washington.

“In setting the official cash rate, we aim to avoid excessive volatility in output growth, interest rates and the exchange rate,” he said. “We seek to respond to changing conditions but avoid rushing into decisions that might need to be quickly reversed and in doing so create uncertainty as to the Reserve Bank’s objectives.”

Hawkish Views

The governor’s speech today provided “more evidence that Wheeler is not ever contemplating cutting the cash rate,” said Annette Beacher, head of Asia-Pacific research for TD Securities Inc. in Singapore.

Wheeler yesterday kept the nation’s benchmark borrowing cost at a record-low 2.5 percent, where it has been held since March 2011, and said that policy makers are watching house prices and credit growth closely.

His remarks today on fiscal restraint align him with Prime Minister John Key’s plan to return to a surplus by 2015 by reforming welfare payments, selling assets and cutting expenditures.

“Important steps are being taken to reduce government spending and this will be an ongoing challenge as demographic change will greatly expand government outlays unless there’s significant policy change,” he said.

Wheeler said New Zealand’s economic fortunes hinge on higher prices for its commodity exports, and on improved labor productivity.

“The good news is that there’s strong international demand for our commodity exports,” he said. “Our labor productivity story is much less impressive.”

Raising the level of saving and investment and improving the quality of investment are means to improve per-capita income, as is improving quality of education and ensuring it’s accessible to all income levels, he said.

The nation needs more investment, including foreign investment, that can bring benefits of job creation, technology transfer and market opening, Wheeler said.

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