N.Z. Leaves Key Rate at 2.5%, Won’t Rule Out Rate Cut
New Zealand’s central bank kept its benchmark interest rate unchanged and said further cuts remain possible amid expectations the economy faces a slow recovery from the worst recession in three decades.
“We continue to expect to keep the cash rate at or below the current level for some time,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at a record-low of 2.5 percent.
Bollard said the economy requires further stimulus from low interest rates because the medium-term outlook is weak even as a “patchy recovery” gets under way. New Zealand’s dollar rose as Bollard omitted a comment that the cash rate “could still move modestly lower” that was in his July statement and traders bet he won’t need to cut borrowing costs again.
“Declining to cut today has signaled that the Reserve Bank is extremely unlikely to cut further,” said Jane Turner, economist at ASB Bank Ltd. in Auckland. “The next move in the cash rate is up and it’s just a matter of when.”
New Zealand’s dollar rose to 69.72 U.S. cents at 10 a.m. in Wellington from 69.59 cents immediately before the decision. The currency has gained 39 percent in the past six months.
The central bank considered that a rate cut wouldn’t make any difference to the currency, which is being pushed higher by U.S. dollar weakness, Bollard told reporters today.
Economic Growth
Traders have been ignoring the prospect of further cuts, and yesterday expected the rate to rise by 97 basis points within a year, according to a Credit Suisse index of swaps prices. A basis point is 0.01 percentage points.
Twelve of 13 economists surveyed last week by Bloomberg News forecast today’s move. One expected a quarter-point cut. Seven predict a rate increase by June 30.
The economy, which began contracting in the first quarter of last year, will start to grow in the third quarter, the central bank said today in its quarterly monetary policy statement. Previously, it expected growth would be delayed until the final three months of the year.
The economy will expand 1.3 percent in the first quarter of 2010 from a year earlier, it forecast today. That’s better than the 0.8 pace predicted in June. Annual growth will accelerate to 3.6 percent by the first quarter of 2011, the bank said.
The Treasury Department said this week it also expects the economy will grow in the three months ending Sept. 30.
‘Patchy Recovery’
“There is more evidence that the decline in economic activity is coming to an end and that a patchy recovery is under way,” Bollard said. “Retail spending appears to have stopped falling following a rise in net immigration and a pickup in the housing market freecreditscore.”
Buoying growth, consumer confidence is at an 18-month high, Roy Morgan Research said last week. House prices rose for a fourth month in August, according to Quotable Value New Zealand, the government valuation agency.
Forty-one percent of companies surveyed by ANZ National Bank Ltd. last month expect sales will improve, the highest reading since March 2005.
The central bank said the risks to the economic outlook are a rising jobless rate, slowing exports and excessive borrowing to pay for consumption and houses. The jobless rate will jump to 7 percent by mid-2010 from 6 percent in the second quarter, it said. Exports will fall 11 percent in the year ending March 31.
Currency Pressure
New Zealand’s currency has been the best performer for the past six months against the U.S. dollar of 16 major currencies measured by Bloomberg. The gains cloud the outlook for exports and tourism, which together make up 40 percent of the economy.
“Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar,” Bollard said today. “If the exchange rate were to continue its recent appreciation, the sustainability of the present recovery will be brought into question.”
Auction prices for milk powder rose 25 percent from July, Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said last week. Still, the ability of the Auckland- based company to pass on higher prices to farmers is limited by the strength of the New Zealand dollar, the company has said.
The central bank said the currency’s gains are more than would be consistent with the improving outlook for the economy relative to New Zealand’s trading partners.
Finance Minister Bill English said this week the currency is “out of line with fundamentals” and may hamper his desire for the nation’s recovery to be based around exports and investment rather than consumption led by borrowing.
Rate Differential
The currency may decline if New Zealand’s cash rate stays unchanged and the benchmark in neighboring Australia rises, English said, referring to economists’ expectations that the Reserve Bank of Australia may raise its benchmark from 3 percent in the fourth quarter.
“With the New Zealand dollar hitting one-year highs at almost 70 cents, this spells bad news for the export sector,” Don Nicolson, president of Federated Farmers of New Zealand, said in an e-mailed statement. “New Zealand could easily dip back into a sharp recession unless there is a sustained export- led recovery.”
Filed under: technology by Wolf