GO
Loading...

New Zealand Central Bank Holds Rates, Steady Outlook

Reuters
Wednesday, 12 Sep 2007 | 10:17 PM ET

New Zealand's central bank kept interest rates on hold at 8.25%, as expected, on Thursday amid a slowing domestic economy and global credit market turmoil.

But the Reserve Bank of New Zealand, which has lifted rates by a total of 100 basis points this year, said inflation remained a concern and rates were likely to stay on hold for the foreseeable future.

Economists said the statement was balanced, leaving the central bank with room to respond to events.

"(There's) acknowledgement of global and local financial market risks, and their inflation assessment lacks a lot of conviction, so we remain comfortable that the Reserve Bank will be easing from mid-2008," said Goldman Sachs JBWere economist Shamubeel Eaqub.

The New Zealand dollar nudged firmer to $0.7124/24, but short-term
interest rates were unmoved with the 90-day bank bill at 8.85%.

All 17 economists surveyed by Reuters expected the central bank to leave rates unchanged after raising them for the fourth straight time in late July.

As a result of the series of policy tightenings, the central bank said robust domestic spending was starting to slow, which would help ease inflation pressures.

"Recent inflation outcomes have highlighted widespread inflation pressures but indicators in recent weeks suggest that previous increases in the OCR are starting to ease domestic spending," Governor Alan Bollard said in a statement.

The latest data from government agency Quotable Value showed the pace of house inflation accelerated in August with the annual rate rising 13.3%, although the volume of sales was reported to be lower.

Last month, data showed closely followed retail sales volumes fell for the first time in 18 months in the second quarter.

The central bank said it was still too early to assess how the turmoil in the global credit market would impact the domestic economy, though it cut its annual average growth forecast for the year through the March 2008 quarter to 2.9%, from June's forecast of 3.1%.

Bollard said inflation remained a concern and interest rates would remain on hold "for the foreseeable future."

The central bank lifted its 90-day bank bill forecast -- seen as a key indicator for policy outlook -- to an average 8.6% through 2008, signaling it was likely to keep interest rates at current levels in the coming quarters.

"In the short-term CPI inflation is likely to rise due to the effects of a lower exchange rate and food prices," Bollard said. "It is important that this temporary increase inflation does not affect
price-or wage-setting behaviour in the medium term."

The New Zealand dollar's trade weighted index (TWI), the central bank's preferred currency barometer, fell 8 percent in August as risk-wary investors reduced positions in carry trades, where investors borrow in low-yielding currencies, such as the yen, to invest in high-yield assets, such as the NZ dollar.

Last month dairy giant Fonterra Co-operative Group raised its forecast payout to farmers for the coming season by 16%, which is expected to pump around NZ$2.5 billion into the economy.