Wednesday, December 9, 2009

Bollard Says He Will Raise N.Z. Rates Sooner; Currency Rises

By Tracy Withers

Dec. 10 (Bloomberg) -- New Zealand’s central bank says it will raise the benchmark interest rate sooner than it previously indicated as a stronger housing market leads the economy out of recession. The nation’s currency gained.

“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle 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. In October, he said rates would be on hold until the second half of next year.

Bollard said the economy has moved out of recession, buoyed by demand for housing and rising commodity prices. Higher house prices and a pickup in consumer and business confidence have fanned expectations he may raise borrowing costs as early as March to counter emerging price pressures.

“Clearly the record low cash rate is approaching its use-by date,” said Annette Beacher, senior strategist at TD Securities in Singapore. “Those of us looking for a modest ramp up in the tightening bias were not disappointed.”

New Zealand’s dollar rose to 71.97 U.S. cents at 9:55 a.m. from 71.23 cents immediately before the statement. The yield on a three-month bank-bill futures contract maturing in June increased to 3.81 percent from 3.56 percent.

All 12 economists surveyed by Bloomberg News expected today’s decision. Four, including Beacher, forecast a rate increase in the first quarter of next year and six predict the first move in the second quarter.

Inflation Target

Bollard is required to keep annual inflation between 1 percent and 3 percent. The consumer price index will rise 1.4 percent next year and accelerate to 2.6 percent in 2011, the central bank said today.

“A key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending,” Bollard said. “At this point, credit growth remains subdued, suggesting households are being relatively cautious.”

Banks aren’t lending as freely to consumers and home-loan rates have risen to reflect their increased funding costs, he said.

Export earnings will be subdued because “the high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery,” said Bollard.

Tighter Conditions

“Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the cash rate and bank funding costs, reduces the need for more immediate action” on the official cash rate, Bollard said.

The economy grew 0.1 percent in the three months to June 30, the first expansion in six quarters, buoyed by low interest rates, tax cuts and extra government spending.

The economy will expand 1.9 percent in the first quarter of 2010 from a year earlier, the Reserve Bank said in new forecasts published today. That’s better than the 1.3 pace predicted in September. Annual growth will accelerate to 4.2 percent by the first quarter of 2011, the bank said.

“The economy continues to recover, reflecting world growth, higher export commodity prices, increased government spending and housing strength,” said Bollard.

House Prices

House prices have increased 9.4 percent since a low in January and property sales in October surged 36 percent from a year earlier, according to the Real Estate Institute.

A stronger housing market helped drive consumer confidence to a 22-month high in October, according to an index compiled by Roy Morgan Research and ANZ National Bank Ltd.

Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National index published last week.

Signs of a global recovery and rising commodity prices boosted business confidence to a 10-year high last month, according to a separate ANZ National survey.

“While business confidence has improved, actual business spending remains weak,” Bollard said.

Finance Minister Bill English said yesterday the economy is improving and may grow faster than forecast in his May budget. “The picture is patchy” and the government is yet to see business confidence convert into investment and jobs, he told parliament’s finance and expenditure select committee.

Jobless Rate

A challenge for the economy is the rising jobless rate, English said. Unemployment was at a nine-year high of 6.5 percent in the third quarter. The Reserve Bank expects the rate will increase to 6.6 percent by the first quarter of next year and decline to 6.3 percent a year later.

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

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate for an unprecedented third straight month last week to 3.75 percent. He will increase borrowing costs to 4 percent at his next review on Feb. 2, according to all 16 economists in a Bloomberg News survey.

Buoying New Zealand’s economy, auction prices for milk powder sold by Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, have jumped to a 16-month high, prompting the Auckland-based company to increase its payment to its local suppliers.

To be sure, the currency’s gains may slow the recovery by curbing exports, which make up 30 percent of the economy.

Banks have boosted estimates for the New Zealand dollar, assuming Bollard may raise rates as soon as March, according to a Bloomberg News survey. The currency will likely rise 6 percent to 75 U.S. cents by March 31, according to the median estimate in the poll of 32 strategists.

Commodity export prices in November were 17 percent higher than a year earlier, according to an ANZ National Bank index. After converting to local dollars, prices were 8.5 percent lower.

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