New Zealand, Amid a Recession, Must Wait for Rate Cut

By Tracy Withers

July 22 (Bloomberg) -- New Zealand central bank Governor Alan Bollard will probably keep interest rates at a record this week to fight inflation, ignoring a slump in consumer confidence and housing that may have pushed the economy into recession.

The Reserve Bank will keep the official cash rate at 8.25 percent, according to 11 of 15 economists surveyed by Bloomberg. Four say Bollard will cut the rate a quarter point when he announces his decision at 9 a.m. on July 24 in Wellington.

Bollard expects inflation will accelerate to an 18-year high this year and won't fall below the 3 percent limit of his target range until mid-2010. The Governor, who said on June 5 he is ``likely'' to lower borrowing costs this year, doesn't want to cut too soon in case he fans wage demands, said economist Brendan O'Donovan.

``The softer growth picture since June doesn't diminish the risk of creating new problems by easing aggressively,'' said O'Donovan, chief economist at Westpac Banking Corp. in Wellington. ``The Reserve Bank clearly set out a slow and steady approach in June. We don't think enough has changed for them to abandon their plan.''

Cutting rates too soon could also drive down the nation's currency and bolster the price of imports.

O'Donovan is among the 11 economists who expect a rate cut at the Sept. 11 review, by which time the central bank will have information on second-quarter wages, employment and retail spending to gauge inflation pressures.

Global Dilemma

Consumer prices rose 4 percent in the year ended June 30, the fastest annual pace in two years. Bollard last month forecast the inflation rate will accelerate to 4.7 percent, the highest since the fourth quarter of 1990. Westpac expects inflation will exceed 5 percent this year.

Traders are betting the slump in domestic demand will spur Bollard to cut rates this week. There is a 50 percent chance of a quarter-point cut from 27 percent at the start of the month, according to an index calculated by Credit Suisse, based on swaps trading.

Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.

Bollard said last month he couldn't rule out the possibility of a recession as rising prices, record-high interest rates, a drought and a slumping housing market stall the economy.

Housing Slump

Gross domestic product contracted 0.3 percent in the first quarter. Eight of 13 economists surveyed by Bloomberg News expect it also shrank in the three months ended June 30, putting New Zealand in its first recession since 1998.

Sales of New Zealand houses slumped for a fourth straight month in June, the Real Estate Institute said on July 11. Property prices fell 2.2 percent from a year earlier and the median time it took to sell a home increased to 53 days, the longest since January 2002.

Consumer confidence fell to a record low in the two weeks ended June 29 because of the prospect of recession, according to a survey conducted by Roy Morgan.

Slowing sales are eroding earnings at retailers such as Hallenstein Glasson Holdings Ltd., which said on July 10 that full-year profit will fall at least 28 percent as sales drop. The clothing retailer became the third New Zealand store owner to cut earnings forecasts in two weeks.

`Fierce Competition'

``The current environment is the most challenging experienced for a number of years,'' Chief Executive Officer Shayne Quanchi said. ``There is fierce competition for consumers' wallets.''

Bollard, 57, has kept interest rates unchanged since July last year, waiting for evidence slower economic growth will curb inflation.

By contrast, central bankers from Frankfurt to Bangkok are raising rates after losing bets that a global slowdown would contain prices.

On July 16, Thailand's central bank raised its benchmark interest rate for the first time in two years to combat decade- high inflation. The European Central Bank increased rates a quarter point this month after inflation accelerated.

Following is a table of forecasts for New Zealand's cash rate at the next four reviews, and the target at the end of the second quarter next year.

2008 2009
July Sept. Oct. Dec. June
Median 8.25% 8.0% 7.75% 7.5% 6.75%
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ANZ National 8.0% 7.75% 7.5% 7.5% 7.25%
ASB Bank 8.25% 8.0% 7.75% 7.5% 6.75%
BNZ 8.25% 8.0% 7.75% 7.5% 6.5%
Citigroup 8.25% 8.0% 7.75% 7.5% 6.75%
Deutsche 8.0% 7.75% 7.5% 7.25% 6.25%
First NZ 8.25% 8.0%% 7.75% 7.5% 7.25%
Goldman Sachs 8.25% 8.0% 7.75% 7.5% 6.5%
HSBC 8.25% 8.0% 8.0% 8.0% 7.5%
ICAP 8.25% 7.75% 7.25% 7.0% 6.0%
JPMorgan 8.25% 8.0% 8.0% 7.75% 7.5%
Macquarie 8.0% 7.75% 7.75% 7.5% 6.5%
RBC 8.0% 7.75% 7.5% 7.25% 6.25%
TD 8.25% 8.0% 7.75% 7.5% 6.5%
UBS 8.25% 8.0% 7.75% 7.5% 6.75%
Westpac 8.25% 8.0% 7.75% 7.5% 7.5%
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To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.