Wednesday, January 23, 2008

New Zealand Leaves Key Rate Unchanged at Record 8.25% (Update2)

By Tracy Withers

Jan. 24 (Bloomberg) -- New Zealand's central bank left the benchmark interest rate at a record-high 8.25 percent to combat accelerating inflation, saying the prospects of slowing global growth haven't curbed the domestic economy.

``The New Zealand economy is projected to keep growing reasonably well,'' Reserve Bank Governor Alan Bollard said in a statement released in Wellington today. ``The labor market remains tight, domestic income growth is still strong and core inflationary pressures persist.''

The longest economic expansion in 60 years has soaked up labor, fanning wages and pushing inflation above the central bank's target, giving Bollard little scope to cut borrowing costs anytime soon. A U.S. economic slowdown that prompted Federal Reserve policy markers to cut rates at an unscheduled meeting this week may spread to New Zealand later this year, allowing Bollard to cut borrowing costs

``Interest rates are set to stay at the current high levels for some time,'' said Khoon Goh, senior economist at ANZ National Bank Ltd. in Wellington. ``We expect an easing toward the end of the year. The global slowdown will eventually have a large impact on New Zealand.''

New Zealand's dollar rose to 76.74 U.S. cents at 10:10 a.m. in Wellington trading from 75.96 cents immediately before the statement.

The central bank will be watching the ``turbulence'' in financial markets and the deteriorating outlook for the U.S. and European economies, ``particularly their implications for the Asian and Australian economies and for world commodity prices,'' Bollard said.

Annual Inflation

Bollard raised borrowing costs four times between March and July last year, and has kept the official cash rate unchanged since then as the housing market and consumer spending slows.

Still, annual inflation accelerated to 3.2 percent in the fourth quarter, above the 1 percent-to-3 percent range the central bank is required to target. In December, Bollard forecast inflation may reach 3.5 percent this year and will stay above the target until mid-2009.

``Ongoing inflationary pressures are underpinned by an expansionary fiscal policy and rising food and energy prices,'' he said today, reiterating that inflation will remain above 3 percent throughout 2008.

All 15 economists surveyed by Bloomberg News predicted today's decision. Eleven expect the rate will remain unchanged until at least June 30. Two forecast a cut by then and one expects an increase.

Federal Reserve

``The outlook for interest rates is little changed from December, but the level of uncertainty has increased,'' Bollard said, adding that the current level of the official cash rate ``remains consistent'' with achieving the inflation target over the medium term.

In December, Bollard said rates may have to stay high for longer because of the outlook for inflation.

The Fed cut the U.S. benchmark on Jan. 22 by three quarters of a percentage point to 3.5 percent, the single biggest reduction since the bank began using the rate as the principal tool of monetary policy around 1990.

U.S. retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years. Homebuilders broke ground on the fewest homes since 1991 last month, Commerce Department figures showed on Jan. 17. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Dairy Prices

U.S. stocks fell for a fifth straight day on Jan. 22, amid mounting concern that a U.S. recession will curb consumer spending and company earnings. New Zealand's benchmark stock index has slumped 10 percent this year.

Slowing U.S. economic growth may spread around the world, affecting New Zealand's trading partners and curbing gains in commodity exports. Exports make up 30 percent of New Zealand's $104 billion economy. Australia buys one-fifth of all exports.

World prices of butter and other dairy products, which make up a fifth of all exports, have doubled the past year. Auckland-based Fonterra Cooperative Group Ltd., the world's biggest exporter of dairy products, has raised its payments to farmers who supply its milk, giving them more money to invest in equipment such as tractors, pay debt and spend more on consumer goods and services.

New Zealand's jobless rate fell to a record 3.5 percent in the third quarter. A skills shortage sparked a record 3.3 percent wage increase in the third quarter from a year earlier, according to government figures.

Consumer Spending

Finance Minister Michael Cullen plans to announce income tax cuts in his budget this year. He said last month he had the ``fiscal headroom'' to cut taxes without stimulating inflation.

Evidence is mounting that New Zealand consumer spending and housing demand are slowing as home-loan interest rates increase. The rate on a two-year mortgage averaged 9.3 percent in November from 8.1 percent a year earlier, according to central bank figures.

New Zealand house sales fell 32 percent in December to a seven-year low, according to a Jan. 16 report from the Real Estate Institute of New Zealand Inc.

Warehouse Group Ltd., the nation's biggest publicly traded retailer, said Jan. 7 that sales for November and December were flat from a year earlier and first-half profit growth probably stalled because of slowing spending on electronic goods.

``Big-ticket spending has slowed,'' Chief Executive Officer Ian Morrice said in an interview from Auckland. Spending on consumer electronics ``has tightened up quite a bit for everybody.''

Bollard last month forecast economic growth will slow to 2.6 percent this year from 3.1 percent in 2007. Today's statement contained no new forecasts. The next rate review will be published March 6.

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