Economic Calendar

Thursday, June 14, 2012

N.Z. Signals Rates May Stay at Record Low to 2013 Amid EU Risks

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By Tracy Withers - Jun 14, 2012 6:22 AM GMT+0700

New Zealand’s central bank signaled it may keep interest rates at a record low for another year, extending a 15-month pause as weaker growth eases inflation and Europe’s fiscal crisis clouds the outlook.

“It remains appropriate for monetary policy to remain stimulatory, with the official cash rate being held at 2.5 percent,” Reserve Bank of New Zealand Governor Alan Bollard said in a statement in Wellington today. The central bank lowered its forecasts for economic growth in the next three years, citing falling commodity prices and spending restraint.

Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg

Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg

The RBNZ’s next step may depend on what happens in Europe, where a Greek election June 17 will influence whether it exits the euro, causing greater financial-market turmoil. The New Zealand dollar rose after today’s language lacked any specific signal Bollard will reduce borrowing costs, even as interest- rate swaps reflect a 69 percent chance of a cut by September.

“If you were to see a real euro-zone meltdown, that’s going to be reflected through in our forecasts,” Bollard said at a news conference. “Absolutely that would be a core issue we would be thinking about in terms of monetary policy.”

New Zealand’s dollar bought 77.62 U.S. cents at 11:05 a.m. in Wellington compared with 77.30 cents immediately before the statement. There was a 20 percent chance of a rate cut late yesterday, according to interest-rate swaps data compiled by Bloomberg. Today’s decision was forecast by all 16 economists in a Bloomberg News survey.

Bollard’s Exit

Bollard, 61, has announced he won’t seek to extend his term as governor beyond late September, and said today the Sept. 13 policy decision will be his last.


The central bank forecasts the three-month bank bill yield will be 2.7 percent in the first quarter next year, down from 3.1 percent in its March projections, according to the monetary policy statement also published today. The forecasts are seen as a guide to the direction of the cash rate.

The yield will rise to 3.1 percent by the fourth quarter of 2013, and 3.3 percent a year later, the RBNZ said.

The bank bill forecast “is consistent with not having to push the OCR up for some time,” Bollard said.

Fourteen of the economists surveyed by Bloomberg forecast no change in the cash rate until 2013. Two predicted a quarter- point rate rise in December.

“We see little reason to disagree with an outlook that has the RBNZ on hold until some time in 2013, unless the worst case does occur in Europe in which case the RBNZ will be easing policy,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.

Quake Damage

Bollard has left the cash rate unchanged since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years in Christchurch, its second- largest city, and the surrounding Canterbury province, which killed 185 people and closed the central city.

The recovery has been slow amid concern that Europe’s debt crisis would spill over into weak global demand for exports, which make up 30 percent of New Zealand’s economy.

Unlike counterparts in Australia and China, Bollard hasn’t cut borrowing costs because quake rebuilding is expected to boost growth and stoke inflation in coming years.

“Political and economic stresses in Europe, along with a run of weaker-than-expected data, have seen New Zealand’s trading partner outlook weaken,” he said today. “There is a small but growing risk that conditions in the euro area deteriorate more markedly than is projected. The bank is monitoring euro-area developments carefully given the potential for rapid change.”

Rate Cutting

Australia’s central bank on June 5 cut its overnight cash rate target to 3.5 percent, the lowest since 2009, on concern about Europe’s fiscal problems and slowing Chinese growth. China also last week reduced borrowing costs for the first time since 2008.

New Zealand’s economy is growing at a slower pace than previously projected, reflecting falling commodity prices and modest household consumption, Bollard said. The New Zealand currency has slumped 5.4 percent this quarter after a 5.3 percent gain in the first quarter.

“Increased agricultural production and the weakened global outlook have driven export commodity prices lower,” he said. “The resulting moderation in export incomes although partially offset by depreciation in the exchange rate, will weigh on economic activity.”

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, last month said it will pay its New Zealand farmers less for their milk as global prices moderate.

Growth Outlook

The economy will probably grow 2 percent in the year ending March 31, 2013, down from 3.1 percent predicted in the March policy statement, the RBNZ said.

Growth will improve to 3 percent in the 12 months through March 2014, slower than the 3.7 percent pace projected in March, it said. The main impetus to the expansion is coming from residential investment and the Christchurch rebuilding, the central bank said. Growth is forecast to slow to 1.6 percent in the year through March 2015.

Inflation in the year through June will slow to 1.1 percent and accelerate thereafter, the RBNZ forecast. It will reach the midpoint of the 1 percent to 3 percent range that Bollard is required to target by mid-2013, a year earlier than previously projected, after the government announced new tobacco taxes.

“Current spare capacity in the economy will be absorbed as domestic activity increases, leading to some inflationary pressures,” the RBNZ said. “The removal of some monetary stimulus will offset this.”

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net



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