New Zealand May Lag Behind Australia in Raising Interest Rates

Jan. 25 (Bloomberg) -- New Zealand may lag behind Australia in raising interest rates this quarter as its economic recovery trails its larger neighbor and inflation remains within central bank Governor Alan Bollard’s target range.

The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent in its decision at 9 a.m. in Wellington on Jan. 28, according to all 14 economists surveyed by Bloomberg. Australia’s currency has outperformed New Zealand’s as traders bet Governor Glenn Stevens will boost his rate by a quarter percentage point to 4 percent next week.

Bollard is seeking to strengthen an economy emerging from its worst recession in three decades, while Australia skirted the global slump and is forecast to record faster growth this year as demand for exports such as iron ore increases.

“Inflation is moderate for now and the Reserve Bank still has some time on its side,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “There is nothing to prod the bank to move as early as January or March.”

Bollard, who has kept the cash rate at 2.5 percent since April last year, said Dec. 10 that conditions may support higher borrowing costs from the middle of 2010.

He said he wants to be sure that domestic demand will remain “solid” as Prime Minister John Key’s government withdraws fiscal stimulus measures, including extra spending on infrastructure, implemented to boost the economy.

Just two economists expect a rate increase in March, with 12 forecasting a move in April or June.

‘Imprudent’ Level

“It will be imprudent to leave monetary policy settings at exceptionally low levels for too much longer,” said Tuffley, who expects a half-point increase on April 29.

Economists forecast the cash rate will be 4 percent by the end of the year, according to the survey. Traders are betting rates will rise to 4.25 percent over the next 12 months, according to a Credit Suisse index based on swaps trading.

New Zealand’s dollar rose to an eight-week high of 74.42 U.S. cents on Jan. 15 amid speculation Bollard may raise rates as early as March. It fell to 71.3 cents late in Wellington on Jan. 22 as expectations waned. The currency has declined 2.1 percent this year against the U.S. dollar compared with a 0.3 percent gain in the Australian currency.

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

Australian Rates

Reserve Bank of Australia Governor Stevens is forecast to boost his benchmark lending rate by a quarter percentage point to 4 percent next week, adding to similar moves in October, November and December, according to 16 of 18 economists surveyed by Bloomberg.

New Zealand consumer prices fell 0.2 percent in the fourth quarter, according to a government report on Jan. 20. Annual inflation was 2 percent, in the middle of the 1 percent-to-3 percent band that Bollard targets. Last month, the governor forecast inflation will be 2 percent or less until early 2011.

The housing market slowed in December, easing pressure on prices, according to a Real Estate Institute report last week. House prices fell for the first time in six months as the number of properties sold declined for a third month.

“The stabilization in prices should ease concerns about a possible renewed bubble in house prices and consequent impacts on domestic demand,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.

Inflationary Expectations

Bollard expects the pace of inflation will accelerate to 2.6 percent by the end of 2011 as the economy expands. Gross domestic product will increase 3 percent this year and 4.1 percent in 2011, he forecast Dec. 10.

Manufacturing grew in December for a fourth month, buoyed by new orders, according to an index published Jan. 21 by Business New Zealand and Bank of New Zealand Ltd.

Retail sales also rose for a fourth month in November, according to a government report last week. Consumer confidence surged to a three-year high in December, according to an ANZ National Bank-Roy Morgan Research index released Jan. 21.

Companies are more likely to hire workers and to invest in the coming months, the New Zealand Institute of Economic Research said Jan. 12. Its survey, conducted in early December, also showed that companies have less spare capacity, meaning they will have to raise prices as they increase production.

Bollard “was looking for spare capacity built up during the recession to damp inflationary pressures,” said Michael Gordon, an economist at Westpac Banking Corp. in Wellington. “Inflation pressure could be building again.”

The central bank can wait until a review on April 29 before raising rates, allowing Bollard to assess data on how the economy ended 2009 and how inflation tracked in the first three months of this year, said Gordon.