N.Z. May Leave Key Rate Steady on Signs of Recovery

By Tracy Withers

July 29 (Bloomberg) -- New Zealand central bank Governor Alan Bollard may keep the benchmark interest rate unchanged for a second month as a recovery in the housing market and business confidence signals an end to the recession.

The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent at 9 a.m. in Wellington tomorrow, according to all 10 economists surveyed by Bloomberg.

Bollard kept rates unchanged last month for the first time in a year, saying there were signs of stability in the global economy and prospects of “slow and fragile” growth in New Zealand by the end of 2009. The nation’s currency has surged the past three months, threatening the pace of the recovery and sparking calls by exporters for Bollard to cut rates further.

“The Reserve Bank is likely to stick to its assumption that the New Zealand dollar will weaken, meaning it is not yet prepared to deliver further rate cuts,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “It will continue to hold and hope the exchange rate will depreciate.”

The currency has strengthened 15 percent against the U.S. dollar the past three months to be the second-best performing of 15 major currencies tracked by Bloomberg. The rising exchange rate erodes the local dollar value of meat, cheese and butter exports, which make up 30 percent of the economy.

The New Zealand dollar traded at 65.74 U.S. cents at 1:49 p.m. in Wellington from 65.78 cents yesterday. It touched 66.34 cents yesterday, the strongest since Oct. 3.

Higher Than Warranted

Finance Minister Bill English said this month the currency was “higher than fundamentals warrant” and may hamper his desire for the nation’s recovery to be based around exports and investment rather than consumption led by borrowing.

Exports fell 5.4 percent in the second quarter, according to a government report yesterday.

“We need to see the Reserve Bank indicate a commitment to lowering the currency,” John Walley, chief executive of the New Zealand Manufacturers & Exporters Association, said in an e-mailed statement. He wants Bollard to cut the cash rate tomorrow.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, has cut its estimated payment to New Zealand farmers by 12 percent, citing falling prices and the currency.

The local dollar needs to be “persistently weak” to ensure growth is driven by investment and exports, Bollard said in a July 14 speech. The risk to the recovery is that consumers, buoyed by rising house prices, spend more and increase their debt, he said.

Housing Recovery

New Zealand’s economy began contracting in the first quarter of last year and is probably in its seventh quarter of recession, according to government forecasts.

The housing market may lead a recovery after second- quarter home prices rose for the first time since late 2007. There were 40 percent more property sales in June than a year earlier, the Real Estate Institute said on July 9.

Consumers are less pessimistic and business confidence recovered in the second quarter, the New Zealand Institute of Economic Research Inc. said this month.

A net 25 percent of companies surveyed last quarter said the economy will worsen over the coming six months compared with 65 percent three months earlier, the Wellington-based institute reported on July 7.

“Borrow-and-Spend’

“With the prospect of recovery comes a growing concern than households could revert to their borrow-and-spend ways,” said Brendan O’Donovan, chief economist at Westpac Banking Corp. in Wellington. “Keeping interest rates too low for too long would obviously fuel that risk.”

Bollard in June said he was unlikely to raise rates until late 2010 and couldn’t rule out further reductions.

The governor will drop his reference to further rate cuts tomorrow while leaving the pledge to keep borrowing costs unchanged, O’Donovan said.

“The Reserve Bank’s focus is on supporting the economy through a period of weak activity, and with inflation pressures muted there’s no urgency to hike rates any time soon,” he said.

Traders see Bollard raising rates earlier, with 88 basis points priced in over the next year, according to a Credit Suisse index based on swaps trading.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.