New Zealand’s Bollard May Signal Earlier Interest-Rate Increase

By Tracy Withers

Oct. 28 (Bloomberg) -- New Zealand central bank Governor Alan Bollard may signal tomorrow that he is unlikely to wait until late next year to raise interest rates as a stronger housing market leads the economy out of 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 11 economists surveyed by Bloomberg. Bollard will rule out further rate cuts as inflation pressures start to emerge, analysts say.

Bollard on Sept. 10 said he expected to keep the cash rate at or below 2.5 percent until the “latter part” of 2010 because the economy’s recovery was just getting under way and needed more stimulus. Traders are betting he may raise borrowing costs in the first quarter of next year after reports in the past month showed consumer prices rose more than expected and house prices jumped.

“They certainly need to have softened their rhetoric from back in September,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “They can’t hold off for as long as the end of next year.”

Two economists expect a rate increase in March and nine predict a move before June 30. Traders are betting the cash rate will rise 235 basis points over the next year, according to a Credit Suisse index based on swaps trading. A basis point is 0.01 percentage point.

Global Rates

Central bankers around the world are now assessing when to start raising rates as the global economy recovers.

Reserve Bank of Australia Governor Glenn Stevens unexpectedly raised his benchmark rate on Oct. 6 to 3.25 percent, the first G-20 central banker to move since the height of the financial crisis. Bank of England Governor Mervyn King wrote in a newspaper last week that “it would be wise” to take into account the prospect of higher rates.

In New Zealand, trader expectations of a rate increase surged after an Oct. 15 report showed inflation accelerated faster in the third quarter than Bollard expected, and that core inflation hasn’t slowed amid the worst recession in three decades.

The economy grew for the first time in six quarters in the three months to June. As growth recovers next year, inflation pressures may accelerate, said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland, who expects the first increase in April.

Housing Market

“Over the past few months the downside risks to the inflation outlook have diminished rapidly,” he said.

Tuffley said a stronger property market and improving confidence amongst consumers and companies will hasten the economic recovery next year.

House prices have increased 7.9 percent since a low in January and property sales in September surged 44 percent from a year earlier, according to Real Estate Institute figures.

A stronger housing market helped drive consumer confidence to a four-year high in the third quarter, according to an index complied by Westpac Banking Corp. and McDermott Miller Ltd.

Signs of a global recovery and rising commodity prices boosted business confidence to a 10-year high last month, according to an ANZ National Bank Ltd. survey.

Bollard “won’t want to give wind to the market view that they’ll be hiking rates early next year” because the economic recovery is just getting under way and there are a lot of risks for sustainable growth, Ebert said.

No Pay Increases

“There are still some broader risks out there,” he said. “Some of the expectations are overrunning reality. Some of the drivers over the next 18 months or so are not really conducive to a strong pickup” in growth.

The government, which borrowed heavily to help boost the economy with tax cuts and spending, plans to remove that stimulus this year. Prime Minister John Key last week said government workers shouldn’t expect large pay increases next year.

Immigration, which rose to a five-year high in the 12 months ended Sept. 30, may be near a peak, said Ebert.

The New Zealand dollar’s 33 percent gain against the U.S. currency in the past six months will curb export returns and is acting as a restraint on economic growth and inflation.

“That can’t be ignored,” said Ebert.

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