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Bets on NZ rate hikes dwindle as kiwi stays high

Monday 23rd April 2012

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Expectations of a hike to the official cash rate over the next 12 months have fallen to the lowest since mid-February as a high kiwi dollar and a modest economic recovery keep inflation well within the central bank's target range.

Governor Alan Bollard will keep the OCR at 2.5 percent this Thursday, according to all 14 economists in a Reuters survey. The bank may lift the benchmark rate just 9 basis points in the next 12 months, based on the Overnight Index Swap curve. 

Bollard has kept the OCR at a record low for two of the past three years, having responded to the emerging global financial crisis by slashing the rate six percentage points over 10 months starting in mid 2008, when the economy was in recession.

In the March 8 monetary policy statement he said the kiwi's strength "would reduce the need for future increases in the OCR" by keeping a lid on tradable inflation. The trade-weighted index is at about the same level as it was when the MPS was released.

"The dovish tone of the MPS will likely be carried over, with the risk that the RBNZ may sound even more cautious," said Jane Turner, economist at ASB, in a preview of the OCR review.

"Because inflationary pressures in the economy still appear to be well contained, and the NZD remains strong, we continue to expect that the OCR will remain on hold until at least the end of the year," she said.

Inflation printed lower than the central bank forecast in the first quarter at 0.5 percent versus the bank's pick of 0.7 percent. Tradable sector inflation shrank 0.4 percent, the second quarterly decline. The central bank tries to keep annual inflation between 1 percent and 3 percent.

The economy grew at half the expected pace in the final three months of 2011 at 0.3 percent. Since then, economic figures have been patchy at best. Credit and debit card spending fell last month.

Building consents fell 6.7 percent in February, excluding apartments. Still, home sales jumped 25 percent in March and the national median sale price rose to a record, according to the Real Estate Institute. Banks are offering fixed rate mortgages at the lowest rates in at least 2 1/2 years, according to data compiled by  

Both the performance of manufacturing and services surveys for March showed a slower pace of expansion.

"Over the past six weeks we’ve had an accumulation of small surprises that all argue in the direction of keeping the OCR low for longer," said Westpac chief economist Dominick Stephens. "The pace of recovery has been slower than expected."

Westpac now expects the central bank won't lift the OCR until March next year.

Prices of commodities, which dominate New Zealand’s exports, have weakened. The ANZ Commodity Price Index fell 1.7 percent in March to the lowest level this year. In Fonterra Cooperative Group’s GlobalDairyTrade auction last week prices fell 9.9 percent, the biggest decline since mid-2010.

The trade-weighted index of the New Zealand dollar was recently at 72.89, above the average levels the Reserve Bank had been expecting for the first and second quarters of the year. The TWI has climbed from 66.38 in late November.

Supporting the kiwi dollar has been the nation's relatively appealing interest rates in a world where major central banks are holding their rates near zero. New Zealand 10-year government bonds yield about 200 basis points more than comparable US Treasuries.

Bollard may reiterate that the expectation is for a slow recovery in growth, fanned by the rebuild of Christchurch.

Last week the International Monetary Fund raised its forecast for global growth this year to 3.5 percent from 3.3 percent and said growth may accelerate to 4.1 percent in 2013.

While the US recovery is picking up pace and concerns about the euro-zone's debt crisis are easing, "risks remain high," the IMF said.


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