New Zealand Could Raise Interest Rate in March, Survey Shows

By Tracy Withers

Oct. 19 (Bloomberg) -- New Zealand’s central bank could raise interest rates as early as March next year as the pace of the economic recovery accelerates and inflation pressures build, according to economists.

Two of 11 economists surveyed by Bloomberg News expect Reserve Bank Governor Alan Bollard will raise the official cash rate in March. Nine expect the rate will be higher by June 30.

Bollard has held the rate unchanged at a record-low 2.5 percent since April and said on Sept. 10 he didn’t expect to raise borrowing costs until “the latter part of 2010” because the economy needed more stimulus as it recovers from recession. Recent reports showing a surge in house prices and faster-than- expected inflation, add to signs Bollard may tighten sooner.

“There’s been tension between a run of strong data and the Reserve Bank’s announced expectation,” said Dominick Stephens, economist at Westpac Banking Corp. in Wellington. “That tension has effectively been snapped by the inflation numbers.”

Westpac today brought forward its estimate of when Bollard will start raising rates to March from July. Last week, ASB Bank Ltd. said it expects an increase in April.

The change in predictions is starting to match traders who higher predict rates from January and expect the cash rate will be 4.5 percent by October next year, according to an index compiled by Credit Suisse, based on swaps trading.

Early Increase

There is a risk the central bank could move earlier than March, although probably not this year, Stephens said.

“Five months of this kind of data is a long, long time,” he said “I don’t think there’s urgency to move this year because that’s not the way they operate. The high exchange rate is going to keep inflation low.”

New Zealand consumer prices rose 1.3 percent in the third quarter, outpacing the 0.8 percent median forecast of economists and Bollard’s own 0.9 percent estimate. Non tradable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel, rose 1 percent, according to the report published on Oct. 15.

“After such a severe recession, non-trabable inflation hasn’t really been reduced to the extent the Reserve Bank would like,” said Stephens.

Adding to pressures on inflation, the housing market is surging and the economy’s rebound from recession appears stronger than initially expected.

House Prices

House prices rose for a fifth month in September and property sales were 44 percent higher than the year-earlier, according to Real Estate Institute figures.

A report today showed services industries such as retail, property and communications, expanded for a third month in September.

The performance of services index rose to 53.2 in September from 51.3 the previous month, Bank of New Zealand Ltd. and Business New Zealand, a Wellington-based employer group, said today in an e-mailed statement. A reading above 50 indicates industries are expanding.

The economy grew 0.1 percent in the second quarter, ending the worst recession in three decades. Growth may accelerate next year as business and consumer confidence improves.

ASB today said the economy will grow 2.4 percent in the 12 months ending March 31, 2011, up from a 1.9 percent forecast the bank made in July.

‘Early Bird’

“The world is starting to wake up from its synchronized recession and New Zealand is one of the early birds,” Nick Tuffley, chief economist at ASB in Auckland, said in an e-mailed report. The economy will contract 1.5 percent this year, he said.

New Zealand’s currency has surged 30 percent against the U.S. dollar the past six months, keeping the prices of imported goods low, but also curbing exports, which make up 30 percent of the economy.

Sustained economic growth will require improving exports and investment and, “until those drivers kick in, recovery will be fragile and vulnerable,” said Tuffley.

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