N.Z. Leaves Key Rate at 2.5% Amid ‘Patchy’ Recovery

By Tracy Withers

Sept. 10 (Bloomberg) -- New Zealand’s central bank kept its benchmark interest rate unchanged and said further cuts remain possible amid a “patchy 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 to combat rising unemployment even as the nation emerges from recession in the second half of this year. A report today showed New Zealand export prices tumbled by the most in 58 years, underscoring Bollard’s concern that a surging currency will curb shipments abroad.

“There is still sufficient risk and uncertainty around the recovery path that the Reserve Bank sees a need to keep policy stimulatory for now,” said Philip Borkin, an economist at ANZ National Bank Ltd. in Wellington. “The soft easing bias remains, though we doubt they will act on it.”

Bollard today omitted the comment that the cash rate “could still move modestly lower” that was in his June and July statements.

Traders are ignoring the prospect of further cuts and expect the rate to rise by 96 basis points within a year, according to a Credit Suisse index of swaps prices at 11:50 a.m. in Wellington. A basis point is 0.01 percentage points.

Economic Growth

New Zealand’s dollar rose to 69.78 U.S. cents from 69.59 cents immediately before the decision.

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.”

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, a government 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 gained 39 percent against the U.S. dollar in the past six months, the best performer 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.

A government report released in Wellington today showed export prices tumbled 11.6 percent in the second quarter from the previous three months as the currency surged by the most in 23 years.

“Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar,” Bollard said. “If the exchange rate were to continue its recent appreciation, then 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.

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.

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