BlackRock Sees RBNZ January Shock With Half-Point Rate Rise

New Zealand’s central bank may shock investors by raising its benchmark lending rate by as much as half a percentage point at its first policy meeting of 2014, according to the world’s biggest asset manager.

The Reserve Bank of New Zealand has held the official cash rate at a record-low 2.5 percent since March 2011 following a series of earthquakes that caused widespread damage in the South Island city of Christchurch. Economic growth in the third quarter accelerated to the fastest pace in almost four years and central bank Governor Graeme Wheeler signaled last week he will lift borrowing costs next year, even as he expressed concern that the currency’s strength could hurt exporters.

Higher rates may help drive the kiwi dollar close to a record-high against Australia’s currency, Stephen Miller, a Sydney-based money manager at BlackRock Inc., said in an interview yesterday. New Zealand is set to become the first developed economy to raise interest rates since 2011 as surging milk production, manufacturing and home building stoke inflation. Traders of overnight index swaps see a 62 percent chance for an increase to 2.75 percent in January with 38 percent odds for no change, data compiled by Bloomberg show.

“First cab off the rank in terms of surprises next year might be the RBNZ hiking by 50 basis points in January,” Miller said. “New Zealand’s a pretty strong economy getting stronger. It’s one of these stories where higher interest rates are actually a harbinger of a healthier economy.”

Accelerating Growth

Gross domestic product in the three months through Sept. 30 increased 1.4 percent from the second quarter, when it rose a revised 0.3 percent, Statistics New Zealand said in Wellington yesterday. That’s the biggest gain since the final quarter of 2009 and better than the 1.1 percent median forecast of economists in a Bloomberg survey. The economy grew 3.5 percent from 12 months earlier, the most in six years.

Consumer prices in New Zealand increased by 1.4 percent in the third quarter from a year earlier, the fastest pace since the first three months of 2012. The inflation report for the fourth quarter of 2013 is due out on Jan. 21.

While 11 of 15 economists surveyed by Bloomberg this month predict that rates will be 25 basis points higher in March, just one is forecasting a quarter-point increase in January.

There is about a 90 percent chance that the RBNZ benchmark will be 3 percent or higher by the middle of next year, OIS pricing indicates.

Currency Appreciation

The New Zealand dollar bought 82.05 U.S. cents as of 3 p.m. in Wellington, up 6.8 percent from the one-year low of 76.84 cents it reached in June. The currency traded at NZ$1.0825 per Australian dollar, having appreciated 16 percent versus its South Pacific peer this year.

BlackRock’s Miller says it’s possible that the kiwi could trade as high as NZ$1.03 per Aussie, given the fundamentals of the two economies and the prospect that Australia’s central bank may implement further rate reductions. That would be close to the NZ$1.0285 reached in June 1997 that was the strongest level since New Zealand scrapped exchange-rate controls in 1985.

That said, BlackRock favors betting on interest rates rather than simply taking a long position on the currency.

“The currency is exhibiting or reflecting the strength of the New Zealand economy, whereas the rates are sort of scratching their heads saying well, we may catch up,” Miller said. “I think the capacity for surprise is on the rates side rather than the currency side. If you’ve got a properly diversified portfolio and want to have a sliver of risk, that’s a good place to park some.”

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