Bollard May Raise N.Z. Rate in March, Economists Say
New Zealand’s central bank may raise its benchmark interest rate as early as March as a surging housing market stokes consumer spending and fans inflation, according to economists and traders.
Reserve Bank Governor Alan Bollard yesterday said he may raise the official cash rate from a record-low 2.5 percent “around the middle of 2010” if the economy recovers as he forecasts. In October, he said rates would be on hold until the second half of next year.
Bank-bill yields jumped and the New Zealand dollar posted its biggest two-day rally since June as traders increased bets Bollard will raise rate sooner than he indicated. Six of nine economists surveyed by Bloomberg News yesterday expect an increase in March or April, while three predict a June move.
“The longer they leave them there and the longer the housing market takes off, the more risk you run that credit growth starts picking up,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland.
Traders expect the official cash rate will rise to 4.71 percent in a year, according to a Credit Suisse index based on swaps trading. There is an 8 percent chance of an increase at the central bank’s next rate review on Jan. 28.
Futures pricing implies 108 basis points of tightening by the middle of the year, according to Bloomberg calculations. A basis point is 0.01 percentage points.
Housing Market
New Zealand’s dollar gained 1.2 percent to 72.76 U.S. cents at 9:35 a.m. in Wellington, from 71.89 cents yesterday, when it jumped 1.7 percent. The yield on a three-month bank-bill futures contract maturing in June increased to 3.89 percent from 3.56 percent before yesterday’s statement.
Currency markets have reacted to the statement more than the central bank expected, Bollard said today.
“It was a fairly subtle shift. There has been a bit of an over-reaction, especially on foreign-exchange markets,” he told Radio New Zealand.
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 Faxless payday loans.
Bollard said he isn’t as concerned by the increase in prices because lending to consumers remains subdued.
“House prices have been picking up, but we’re not seeing the consequent increase in consumption we’ve seen historically,” Bollard said in a Bloomberg Television interview after his statement. “We’re not actually seeing what would be a credit-fueled asset bubble at the moment.”
Consumer Debt
The risk is that consumers start to borrow more as the value of their homes increases, fanning inflation, said Tuffley, who expects a interest-rate increase in April.
“If it gets to the point where it looks like households are living beyond their means again, that’s when the Reserve Bank will start to get a bit worried,” he said.
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 yesterday.
New Zealand’s economy will grow 3 percent next year and 4.1 percent in 2011, the bank forecast. It probably contracted 1.4 percent this year, it said.
“The economy continues to recover, reflecting world growth, higher export commodity prices, increased government spending and housing strength,” Bollard said in the quarterly monetary policy statement.
The central bank expects the economies of New Zealand’s largest trading partners will grow 3.4 percent next year.
Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National Bank index published last week.
Auction prices for milk powder sold by Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, have risen to a 16-month high, prompting the Auckland-based company to increase its payment to its local suppliers.
Filed under: management by Guru