Bollard May Signal N.Z. Rates on Hold Until Mid 2010

By Tracy Withers and Dan Petrie

Dec. 9 (Bloomberg) -- New Zealand central bank Governor Alan Bollard may signal that he is in no rush to raise interest rates as the economy gradually recovers from 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 12 economists surveyed by Bloomberg. Bollard will reiterate that he doesn’t expect to raise borrowing costs until the second half of 2010, analysts say.

Bollard said on Oct. 29 he expected to keep the cash rate at 2.5 percent until at least July because the economy’s recovery was just getting under way and needed more stimulus. Traders are betting he may raise borrowing costs as early as April amid reports of improving business and consumer confidence plus surging house prices.

“The pickup has been no stronger than the Reserve Bank already anticipated,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “The Reserve Bank has time up its sleeve before any reversal of policy stimulus becomes imperative.”

Four economists expect a rate increase in the first quarter of next year and six predict the first move in the second quarter. Traders are betting the cash rate will rise 163 basis points over the next year, according to a Credit Suisse index based on swaps trading. A basis point is 0.01 percentage point.

Currency to Rise

Banks have boosted estimates for the New Zealand dollar, assuming Bollard may raise rates as soon as March, according to a Bloomberg News survey. The currency will likely rise 6 percent to 75 U.S. cents by March 31, according to the median estimate in the poll of 32 strategists.

The currency traded at 70.87 cents at 4.30 p.m. in Wellington. It has gained 22 percent against the U.S. currency the past six months.

Central bankers around the world are now assessing when to remove stimulus as the global economy recovers. Australia and Norway have started raising rates and the Federal Reserve has committed to scale down buying of mortgage-backed debt.

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate for an unprecedented third straight month last week to 3.75 percent. He will increase borrowing costs to 4 percent at his next review on Feb. 2, according to all 16 economists in a Bloomberg News survey.

European Central Bank President Jean-Claude Trichet on Dec. 7 said interest rates in the euro area are appropriate.

Job Losses

In New Zealand, trader expectations of a rate increase have diminished since Bollard’s Oct. 29 statement amid signs that the economic recovery will be gradual and the jobless rate is likely to rise further, curbing spending.

The economy grew 0.1 percent in the three months to June 30, the first expansion in six quarters. Analysts expect growth will be maintained in the third and fourth quarters, led by rising export prices and demand for housing.

House prices have increased 9.4 percent since a low in January and property sales in October surged 36 percent from a year earlier, according to the Real Estate Institute.

A stronger housing market helped drive consumer confidence to a 22-month high in October, according to an index compiled by Roy Morgan Research and ANZ National Bank Ltd.

Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National index published last week.

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

Finance Minister

Finance Minister Bill English said today the economy is improving and could do better than forecast in his May budget. Still “the picture is patchy” and the government is yet to see business confidence convert into investment and jobs, he told parliament’s finance & expenditure select committee.

A challenge for the economy is the high jobless rate, English said. Unemployment was at a nine-year high of 6.5 percent in the third quarter and could reach 8 percent, the New Zealand Institute of Economic Research said last week.

English has expressed concern that the New Zealand dollar’s gain will curb export returns and restrain growth.

Manufacturing sales contracted in the third quarter, according to a government report yesterday. A second report showed home and non-residential construction shrank in the same period.

Cavalier Corp., an Auckland-based carpet manufacturer, is forecasting little sales growth as the weak construction industry and rising unemployment reduces demand.

“We expect consumer confidence to remain fragile for at least the remainder of this financial year while unemployment remains high,” Chief Executive Officer Wayne Chung told the company’s annual meeting on Nov. 12. “Our outlook is for residential carpet sales to remain flat and for a further softening in the commercial carpet sector.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net