N.Z. Keeps Rate at 2.5%, May Tighten 2nd Half of 2010

Oct. 29 (Bloomberg) -- New Zealand’s central bank said it will wait until the second half of next year before raising interest rates because the economy needs further stimulus as it recovers from a recession.

“We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the cash rate at the current level until the second half of 2010,” 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 is keeping borrowing costs steady as his counterparts in Australia and Norway increase their benchmark rates amid accelerating inflation. The nation’s currency fell as traders pared bets the central bank would increase the cash rate as early as the first quarter.

“They had to acknowledge that the official cash rate is unlikely to stay at these levels through the next year,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. Still “they don’t want to threaten the recovery, and they don’t want to fuel the currency.”

New Zealand’s dollar fell to 71.86 U.S. cents at 1:50 p.m. in Wellington from 72.81 cents immediately before the decision. Traders expect 212 basis points of rate increases over the next year, down from 232 points yesterday, according to a Credit Suisse index based on swaps trading. A basis point is 0.01 percentage point.

Rate Outlook

All 11 economists surveyed by Bloomberg News expected today’s decision. Three forecast a rate increase in the first quarter of next year and nine, including Ong, expect higher borrowing costs by June 30.

New Zealand’s currency has surged 25 percent against the U.S. dollar the past six months, the best performing major currency tracked by Bloomberg, as rising house prices and a pickup in consumer and business confidence fanned expectations Bollard may raise borrowing costs as early as January.

Instead, his outlook on rates has changed only slightly since Sept. 10 when he said he expected to keep the cash rate “at or below the current level through until the latter part of 2010.”

The economy grew for the first time in six quarters in the three months to June, buoyed by low interest rates and a fiscal stimulus that included tax cuts and extra government spending.

“The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support to the economy,” said Bollard. “We think such support remains appropriate.”

Fiscal Stimulus

Finance Minister Bill English has signaled he will cut government spending. Removing some fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do, Bollard said.

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

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate on Oct. 6 by a quarter point to 3.25 percent, the first G-20 central banker to move since the height of the financial crisis.

Norway’s central bank yesterday raised its overnight deposit rate to 1.5 percent. Bank of Korea Governor Lee Seong Tae last month signaled he may increase borrowing costs in the future to stem rising property prices.

While the economies of New Zealand’s main trading partners are rebounding, there remains “significant vulnerabilities and challenges to be worked through,” Bollard said.

Inflation Accelerates

In New Zealand, trader expectations of a rate increase in the coming year 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.

Traders saw no chance of an increase today, according to an index compiled by Credit Suisse based on swaps trading in Wellington yesterday.

“Inflation is expected to track comfortably within the target range over the medium term,” Bollard said. The central bank is required to keep annual price gains between 1 percent and 3 percent.

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.

“A very gradual increase in household spending appears to be taking place,” said Bollard. “Government spending is also supporting activity. Business spending, however, remains weak and credit growth is very subdued.”

Business Confidence

Signs of a global recovery and rising commodity prices kept business confidence near a 10-year high in October, according to an ANZ National Bank Ltd. survey published yesterday.

To be sure, the currency’s gains may slow the recovery by curbing exports and tourism, which make up 40 percent of the economy. Spending by foreign tourists in New Zealand fell in the 12 months through March 31, the first drop in a decade, a report showed yesterday.

“The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery, and reinforces a bias toward domestic expenditure,” said Bollard. “After some short-term correction, it is also likely to see the current account deficit begin to widen in the medium term.”