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NZ Central Bank Holds Rates, Wary of Price Pressures

Wednesday, 5 Dec 2012 | 7:46 PM ET
Image Source | Getty Images

New Zealand's central bank held its key rate at a record low for a 14th straight meeting on Thursday, and indicated it would likely stay there into 2014 because of a strong dollar, and the prospect of inflation from a pick-up in earthquake rebuilding and more active housing market.

The Reserve Bank of New Zealand (RBNZ) said it remained "appropriate" for the official cash rate (OCR) to be held at 2.5 percent, where it has been since April last year, the longest period the rate has been left unchanged.

But RBNZ Governor Graeme Wheeler warned of price pressures from earthquake reconstruction and the strong housing market, even as economic growth has slowed in recent months.

"With the reconstruction-driven pick-up in investment now clearly underway, the bank will continue to watch for a greater degree of inflation pressure than is assumed," he said in his first monetary policy statement.

Wheeler, a former World Bank managing director, joined the bank in late September.

He expected domestic demand to pick up, leading to the elimination of current excess capacity by the end of next year.

"This is expected to cause inflation to rise gradually towards the 2 percent target midpoint," Wheeler said.

All 16 analysts polled by Reuters had expected no change in the key rate, even as inflation slowed and after a string of dismal data ranging from weak spending to high unemployment.

The RBNZ's main concern was the earthquake rebuild in the Christchurch region, which will bolster demand and prices over the next few years.

The bank revised up its earthquake rebuilding cost forecast to NZ$30 billion ($25 billion), about 15 percent of the economy, from NZ$20 billion.

"The RBNZ's commentary today emphatically reiterated that the RBNZ expects the next move in the OCR to be upwards," said Westpac chief economist Dominick Stephens.

The New Zealand dollar rose to a high of $0.8291 from $0.8253, before settling back to $0.8280. Interest rate futures were up to 10 points lower, and swap yields up to 8 basis points higher as the bank retained its mild tightening bias in the medium term.

The bank largely kept its forecast for the 90-day bank bill, a barometer for future moves in the cash rate, with the bills expected to be 2.7 percent by December next year, and to 3.2 percent by end 2014, from currently around 2.62 percent. That compared with 2.8 percent in 2013 and 3.2 percent in 2014, respectively.

In contrast, market pricing based on overnight indexed swaps implied a 76 percent chance of a 25 basis point cut in the OCR over the next 12 months partly because of global risks.

In addition, annual inflation slowed to the lowest pace since late 1999, and below the central bank's 1-3 percent target band, on weak consumer and business spending.

The trade-weighted kiwi dollar has gained 6.5 percent this year, slowing exports but keeping a lid on import prices.

Unemployment rose to the worst level in 13 years, as the government is tightening spending to return to budget surplus by 2015, adding a further headwind to the economy.