• Wed
  • Oct 22, 2014
  • Updated: 12:36am
BusinessEconomy
NZ ECONOMY

NZ's central bank expected to leave interest rates unchanged this week

PUBLISHED : Monday, 10 September, 2012, 1:04pm
UPDATED : Tuesday, 11 September, 2012, 9:36am

New Zealand’s central bank is seen as a sure bet to keep its key rate at a record-low level for a 12th straight meeting this week as low inflation, the high local dollar, and a challenging global outlook need no immediate policy action.

In addition, Thursday’s rate decision will be the last for Alan Bollard, the governor of the Reserve Bank of New Zealand (RBNZ) after a decade, and will be replaced by Graeme Wheeler, a former managing director of the World Bank.

Bollard, who is off to head the secretariat of Asia-Pacific Economic Cooperation (APEC) in Singapore from next year, has been a low-key governor content to leave the official cash rate (OCR) unchanged for long periods, although he delivered large, rapid cuts during the global credit crisis.

“With no decisive turn of events since July, and with Bollard stepping down later this month, a firmly on-hold message seems the straightforward choice,” said Westpac chief economist Dominick Stephens.

He said Wheeler may have a markedly different view on where monetary policy should be heading, although it could take a few months before any differences become apparent.

The RBNZ governor has sole responsibility for its policy stance.

All 18 analysts polled by Reuters expect the RBNZ to keep OCR unchanged at 2.5 per cent, with the majority looking for a rate increase in the first half of next year at the earliest.

That is also reflected in financial markets pricing, which implies a largely flat rate outlook over the next 12 months, with small risks of rate cuts, overnight indexed swaps suggest.

For now, there is no need for rate changes, with annual inflation slowing to 1.0 per cent in the April-June period, a near-13 year low, and the economy managing only patchy growth.

The RBNZ has been relaxed on the price front, expecting inflation to remain within its target band of 1 per cent to 3 per cent, even as it has identified inflation threats from the rebuilding of earthquake-damaged Christchurch, and a lift in house prices to record levels in the biggest city Auckland.

But the persistent strength of the New Zealand dollar is straining exporters, making domestic goods less competitive and crimping export earnings, although also dampening imported inflation pressures.

Bollard has said small open economies like New Zealand are wearing some of the cost of easy money policies of major central banks.

The trade-weighted New Zealand dollar, the bank’s preferred measure of the kiwi against a basket of currencies, is up about 4 per cent so far this year.

In the June monetary policy statement (MPS), the bank’s forecast of wholesale interest rates -- the 90 day bank bill -- often used as a proxy for the OCR, signalled rate rises from the middle of next year, with a gradual tightening thereafter.

“Assuming a slightly firmer profile for the exchange rate than previously...the RBNZ will arrive at a similar forward outlook for the economy and inflation as in the June MPS,” said Deutsche Bank chief economist Darren Gibbs.

Recent data has shown unemployment stubbornly high, , households cautious on spending, but a lift in dairy prices, a pick-up in the housing market, and business confidence improving slightly.

In addition, the government is firmly sticking to its belt-tightening plan to bring the budget back into the black by 2015.

However, the global outlook remains murky and worryingly for New Zealand the outlook for its top two trading partners, China and Australia, is looking softer.

 

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