Bollard may signal no hurry to raise NZ interest rates

Published: Mon 6 Dec 2010 07:38 AM
Bollard may signal no hurry to raise NZ interest rates
By Jonathan Underhill
Dec. 5 (BusinessDesk) – Reserve Bank Governor Alan Bollard, staring down the biggest inflation spike in at least a decade, is nevertheless likely to keep interest rates unchanged this week and signal he’s in no hurry to act.
The bank’s last forecast, in September, was for inflation to be 2.3% in the three months ending Dec. 31, driven by the short-term effects of the goods and services tax hike and other levies. The annual rate will reach 4.8% in the second quarter next year before abating back into the 1%-to-3% target range by the December quarter, according to the bank’s forecast track.
Bollard is betting the short-term effects of government imposts will wash out of the economy without sparking any price-setting aspirations. At the bank’s last interest rate review on Oct. 28, he said the “subdued” pace of domestic demand would keep price expectations in check. The nation faces a long, slow recovery and investors not to take too much heart from signs of an improving labour market and consumer spending, he said last month.
“While there may be some tweaks to the interest rate projections this time, the message will remain one of a gradual pace of OCR hikes, resuming in the first half of next year,” Westpac chief economist Brendan O’Donovan said in a Dec. 3 report.
Bollard will keep the official cash rate at 3% when he releases the Monetary Policy Statement on Dec. 9, according to a Reuters poll of 16 economists. That would mark the third straight opportunity the central bank has passed on to raise the OCR after increases in June and July that lifted the benchmark rate from a record low.
Traders are betting on about 60 basis points of increases in the OCR in the next 12 months, based on the Overnight Index Swap curve. After this week’s MPS, the central bank is next scheduled to review the OCR on Jan. 27 with March 10 set for the first full MPS for 2011.
The economic revival stumbled this year. Gross domestic product grew just 0.2% in the second quarter and some economists say it may have stalled in the three months ended Sept. 30. GDP figures for the third quarter are released on Dec. 22.
“We expect the bank’s formal projections will point to weaker GDP growth in the year to March 2011 than had been the case in September,” Deutsche Bank chief economist Darren Gibbs said in a note.
The central bank had expected the economy to expand 0.9% in the calendar second quarter of 2010, while growth actually sputtered in at 0.2%. The third quarter’s growth would have been slowed by Canterbury’s earthquake, potentially halving Bollard’s forecast of 0.8%, Gibbs said.
Disasters and calamities characterised 2010, from Southland’s massive lamb losses in foul weather, to the earthquake, deadly Pike River mine explosions and the kiwifruit bacteria Psa.
To be sure, New Zealand’s economy wasn’t killed off in the process. Business confidence rose for a second month in November, with companies anticipating profit growth and easier credit, according to the National Bank Business Outlook.
Inflation ran slightly hotter than the central bank’s September MPS projection at 1.1% in the third quarter. Unemployment has eased back to 6.4%.
Bollard will also be weighing global influences in this week’s statement. The U.S. Federal Reserve’s second round of quantitative easing has weakened the greenback and helped keep the kiwi dollar uncomfortably high at above 74 U.S. cents in the past two months, having gained 5.5 % this year.
Renewed efforts to contain Europe’s sovereign debt crisis may drive up credit costs and availability, with potential consequences for the New Zealand economy.
Australia, the biggest export market and trading partner, has posted slower economic growth and weaker retail sales, suggesting some steam coming out of that market.
Growth “is likely to remain strong in China,” Bollard said in the September MPS.

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