By Tracy Withers March 11 (Bloomberg) — New Zealand’s central bank said it will wait until the middle of the year before raising interest rates as falling house prices and weak consumer spending are contributing to a slow economic recovery. “Households are still cautious with house sales and credit growth remaining subdued,” Reserve Bank Governor Alan Bollard said in Wellington today, after leaving the official cash rate at a record low of 2.5 percent. “We continue to expect to begin removing policy stimulus around the middle of 2010.” Bollard said the economy is in a “relatively sluggish” recovery as demand is being constrained by higher home-loan and business interest rates as banks pass on their increased funding costs. Expectations of a rate boost as early as March or April have dimmed after house prices fell in January and credit card spending declined for a second month in February. “Recent developments in the housing and labor markets should have some impact on how the bank judges the risks around inflation,” Darren Gibbs , chief New Zealand economist at Deutsche Bank AG in Auckland, said ahead of the statement. Bollard will “probably see slightly more scope for delaying the first hike.” New Zealand’s dollar bought 70.30 U.S. cents at 9.06 a.m. in Wellington from 70.68 cents immediately before the statement. In January, Bollard said he expected to raise interest rates around the middle of 2010, assuming the economy recovered in line with his December projections. Funding Costs The economy “is recovering broadly as expected and growth is predicted to pick-up further through 2010,” he said today. The bank’s outlook for three-month bill yields, a guide to future cash rate levels, is unchanged at 2.9 percent in the second quarter, and rises to 3.3 percent in the third quarter. “Higher bank funding costs have reduced the level of stimulus that would normally be associated with any given level of the cash rate,” Bollard said. “We would expect these costs to persist over the projection period, reducing the extent of further increases in the cash rate.” In contrast to New Zealand, Australia’s central bank has raised its benchmark lending rate four times since October to 4 percent because its economy is accelerating and is in the biggest jobs boom in more than three years. New Zealand’s cash rate remains attractive compared with the Federal Reserve target of 0.25 percent and the 0.5 percent base rate in the U.K., explaining the currency’s 42 percent surge over the past year. Inflation Outlook Nine of 13 economists surveyed by Bloomberg News expected a rate increase in June. Two expect a move in April and two are tipping the third quarter. None forecast an increase today. Bollard, who is required to keep annual inflation between 1 percent and 3 percent, raised his price forecasts, saying excess capacity in the economy is being used up and the currency is likely to decline, making imports more expensive. New accident insurance levies will be introduced in the third quarter. The consumer price index will rise 2 percent this year, the central bank said in new forecasts published today. That’s more than the 1.4 percent predicted in December. Inflation will accelerate to 2.8 percent in 2011, it said. The forecasts exclude the first-round effects of the emissions trading systems which include levies on fuel and electricity, and will add 0.4 percentage points to annual inflation in the year through June 2011, the central bank said. Annual Growth The economy will likely expand at an annual pace of 1.9 percent in the first quarter, matching the growth predicted in December, the bank said. Annual growth will accelerate to 4.4 percent by the first quarter of 2011, the bank said. New Zealand’s economy grew 0.2 percent in the second and third quarters of last year as it began recovering from the worst recession in three decades. Gross domestic product likely increased 0.6 percent in the fourth quarter, the central bank said today. The official figures are published March 25. Quarterly growth will average 1 percent in 2010, buoyed by a global recovery and increased employment, the bank said. New Zealand’s jobless rate probably peaked at a 10-year high of 7.3 percent in the fourth quarter, the central bank said. It forecasts 6.1 percent by the first quarter next year. So far this year, rising unemployment has dented consumer confidence, and spilled over into retail spending and housing. About two-thirds of 1,000 consumers said that February was a bad time to spend, according to a UMR Research poll. Card Spending Spending on debit and credit cards, excluding fuel, dropped for a second month in February, according to a government report this week. House prices fell for a second month in January, according to an index compiled by the Real Estate Institute. Economic conditions are demanding for retailers, Postie Plus Group Ltd. said on March 9. The Christchurch-based clothing company posted a NZ$1.1 million ($770,000) loss in the six months ended Jan. 31. “Consumer confidence remains fragile but is improving,” Chief Executive Officer Ron Boskell said in a statement to the stock exchange. Prime Minister John Key ’s government wants to bolster economic growth by encouraging more investment and less consumption. A package of lower personal taxes, a higher sales tax and levies on property investment may be included in the May budget, Key said last month. Companies are more confident about the outlook, with ANZ National Bank Ltd.’s gauge of business sentiment rising to a 10- year high in February. The nation’s terms of trade index, which measures the amount of imports New Zealand can buy from a fixed quantity of exports, surged 5.7 percent in the fourth quarter, according to a government report yesterday. Still, business spending is weak, Bollard said. Companies will increase production by hiring more workers rather than undertaking capital investment, he said. To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net
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Bollard Says New Zealand Central Bank to Keep Rates Steady Until Mid Year
