GO
Loading...

New Zealand Holds Rates, Seen Steady for Longer

Reuters
Wednesday, 5 Dec 2007 | 7:47 PM ET

New Zealand's central bank held interest rates steady on Thursday at 8.25 percent as expected, and said it was likely to keep them there for longer than it had previously thought because of increasing inflation concerns.

The New Zealand dollar jumped nearly 1 percent after the Reserve Bank of New Zealand raised its inflation forecast due to rising food and oil prices, as well as the prospect of personal income tax cuts next year.

"They've pushed out any hope of an easing even further, so they'll sit where they are as long as it takes to take inflation pressure out," said Craig Ebert, senior economist at Bank of New Zealand.

In contrast to other central banks which have expressed concerns about the economic outlook as world markets tackle fallout from the U.S. housing downturn, the RBNZ said only that the market turbulence posed a major risk to some of its key trading partners.

"The RBNZ's sanguine take on the global situation, especially after the Reserve Bank of Australia heightened concern on this front in its statement yesterday, is a little disconcerting," said Su-Lin Ong, senior economist at RBC Capital Markets.

The Bank of Canada cut interest rates by a quarter point on Tuesday, a major turnaround given it was tightening as late as July. The RBA downgraded its formerly optimistic view of world growth when keeping its rates on hold on Wednesday.

The European Central Bank is expected to keep rates on hold later on Thursday, with officials seen toning down their rhetoric on inflation.

New Zealand's interest rates, the highest in the industrialized world, were a key factor that pushed the country's currency, known as the kiwi, in July to its highest level since it was floated more than two decades ago.

The kiwi , which jumped nearly three quarters of a cent on Thursday's statement, was trading around $0.7725 in the Asian morning session. The yield on the March bank bill rose six basis points to 8.75 percent.

A Reuters poll conducted after the RBNZ announcement showed most of the 14 economists expected rates to remain on hold until late next year.

The central bank said a cooling property market was expected to slow household spending following four interest rate increases between March and July, but rising commodity prices along with expected personal tax cuts next year were likely to add upward pressure on inflation.

"Overall, inflation pressures have increased, and interest rates are now likely to remain around current levels for longer than previously thought," Governor Alan Bollard said.

The central bank raised its inflation forecast, predicting the annual rate would average 3.1 percent during the first half of 2008 and 3.4 percent in the second half. That compares with its September forecasts of 2.9 percent and 3 percent respectively.

The bank must keep annual inflation within a range of 1 percent to 3 percent on average over the medium term.