New Zealand Leaves Key Rate Unchanged Amid Recovery (Update4)

By Tracy Withers


June 11 (Bloomberg) -- New Zealand’s central bank kept its benchmark interest rate unchanged for the first time in a year amid signs that a pickup in the housing market may bring the worst recession in more than three decades to an end.

“We expect the New Zealand economy to begin growing again toward the end of this year, but the recovery is likely to be slow and fragile,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at 2.5 percent. “It’s likely to be some time before monetary policy support can be withdrawn.”

Bollard has cut interest rates by 5.75 points since last July to help kick-start an economy that began contracting in the first quarter of 2008. House sales are rising and businesses are more optimistic about sales and profits, adding to signs the economy may return to growth before the end of the year.

“The Reserve Bank’s easing cycle is now most likely at an end, barring a further downturn in global or domestic economic indicators,” said Darren Gibbs, chief economist at Deutsche Bank AG in Auckland. “We do not expect the Reserve Bank to reverse the easing cycle any time soon.”

New Zealand’s dollar bought 63.65 U.S. cents at 2:20 p.m. in Wellington from 62.60 cents immediately before the announcement.

Bollard reiterated his expectation that he won’t raise borrowing costs until late next year.

Rate Outlook

“We expect to keep the cash rate at or below the current level through until the latter part of 2010,” he said. “The rate could still move modestly lower over the coming quarters.”

Six of 11 economists surveyed by Bloomberg News forecast today’s move. Three expected a quarter-point reduction and two predicted a half-point cut.

New Zealand’s recovery will be hampered by the currency’s 25 percent surge against the U.S. dollar in the past three months, say farmers and exporters, whose shipments make up 30 percent of the economy. Bollard agrees.

The currency is “not really contributing to the sort of external conditions we would hope would lead an export-led recovery in New Zealand,” Bollard said in an interview today with Bloomberg TV. “We really need to see a more sympathetic exchange rate.”

The central bank assumes the currency will decline, reflecting the nation’s large foreign debt and a renewed focus on the weak economic outlook. The dollar’s gains have created a “premature tightening in financial conditions” and that is one reason the cash rate will stay low until late next year, it said.

Dairy Payout

The rising currency “will badly hurt the economy now and in the future,” John Walley, chief executive of the New Zealand Manufacturers and Exporters Association, said on June 9. “It is clear that we need more than cuts to the cash rate and the same old talk.”

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, said last month it will pay its New Zealand farmers 12 percent less for milk in the season ending May 31, 2010, because of weak prices and the strong currency. That would cut farm incomes by NZ$830 million ($513 million).

Bollard said he expects rate cuts since July to be passed through to consumers and businesses.

“There is room for further reductions in shorter-term lending rates,” he told a parliament select committee today.

New Zealand’s economy began contracting in the first quarter of last year amid a drought and a housing slump as Bollard pushed borrowing costs to a record high. The recession was prolonged by the global credit crisis and a slump in commodity prices that stalled exports and business investment.

Job Losses

Bollard today said the economy will probably contract in the second and third quarters before growth returns in the three months ending Dec. 31. The economy will shrink 1.3 percent in the year ending March 31, 2010, before growing 3.2 percent the next year.

The jobless rate may peak at 7.2 percent in the second quarter of next year from 5 percent in the first quarter of 2009, the central bank said. That’s less than the 8 percent peak forecast by the Treasury Department last month.

House sales rose from a year earlier for a third straight month in May, a report showed today. Home-building approvals increased for the second time in three months and immigration growth was the strongest in five years.

Confidence Rising

New Zealand businesses were optimistic in May for the first time in eight months, according to a survey by ANZ National Bank Ltd. published May 27. Consumer confidence in May was the strongest since September, according to a Roy Morgan Research poll published this week.

Globally there are signs of economic activity stabilizing, Bollard said.

U.S. payrolls fell in May by the smallest amount in eight months, reinforcing signs the recession is starting to abate.

Australia’s economy unexpectedly grew in the first quarter, allowing the nation to avoid a recession. The Reserve Bank of Australia kept its benchmark interest rate unchanged at 3 percent on June 2 for a second month. The European Central Bank kept its refinancing rate unchanged at 1 percent on June 4.