Monday 5th December 2011
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Two weeks ago, Reserve Bank Governor Alan Bollard was seen cutting New Zealand's benchmark interest rate at least a quarter point in the next 12 months. Those bets have dried up ahead of his quarterly review this week but there's no increase on a horizon clouded by Europe.
Bollard will keep the official cash rate at 2.5 percent when he releases the Monetary Policy Statement on Thursday, according to a Reuters survey of 13 economists. That's the lowest since the rate was introduced in March 1999 and a level it has held at for two of the past three years.
The Overnight Index Swap curve suggests he could raise the OCR by just 4 basis points in the next 12 months.
"For the RBNZ, the immediate concern has to be Europe and just how bad this might get," including a low probability the euro zone breaks up, UBS New Zealand senior economist Robin Clements said in a note.
"It is this that will drive the ‘prudent to stay on hold’ line and, were it to eventuate, the possibility of needing to cut rates sooner rather than later," Clements said.
Government bond yields in the US and New Zealand have charted all-time lows as Europe's spiraling debt crisis sent investors looking far afield for safe havens. New Zealand's government has the lowest costs for new borrowing in memory.
By contrast, in Europe, credit quality of sovereign debtors has been weakened by unsustainable borrowing and nations including Italy and Greece are having to offer what some analysts say are unsustainably high coupons
Bollard's last statement on monetary policy was on Oct. 27, when he referred to "the real risk that the European sovereign debt crisis could cause a further slowing in global activity."
New Zealand exporters have benefited from a kiwi dollar that has fallen about 12 percent against the US dollar from the post-float peak it reached at the start of August. Even in trade-weighted terms, the local currency has fallen 8 percent from Aug. 1.
But that's not enough for manufacturers and exporters, who are calling for a cut to the OCR at this week's review.
Cutting interest rates would push the kiwi dollar down further and buy kiwi firms some time, says NZ Manufacturers and Exporters Association chief executive John Walley says.
"It is naive to think that we will be insulated from the problems in Europe," Walley said in a statement. "While only around 10 percent of our exports are sold there the impact of debt problems there will make it more difficult for New Zealand to borrow offshore.”
He said the decision by the world's biggest central banks to lower the interest rate on US dollar liquidity swap lines by 50 basis points shows they are "taking concerns in Europe seriously.”
New Zealand's 2.5 percent rate is expected to look relatively more attractive by Thursday, with the Reserve Bank of Australia forecast to cut its benchmark rate by 25 basis points to 4.25 percent on Tuesday. That would help underpin the economy of New Zealand's biggest trading partner.
At Bollard's mini-review in October, when he kept the OCR at 2.5 percent, he said temporary inflation pressures like the goods and services hike would wash out of the consumer price index, allowing underlying inflation to settle at a relatively benign 2 percent.
The most marked change from the last full monetary policy statement in September will be what Bollard says about the timing of hikes to the OCR, said Dominick Stephens, chief economist at Westpac.
In September Bollard "signalled steep hikes beginning in March 2011," Stephens said. "This time, the RBNZ is likely to push the mooted start date out to late 2012, and to signal a less aggressive program of hikes."
By then, there should be concrete signs of commerce flowing from the rebuild of Christchurch. Repeated earthquakes have pushed out the start date and left companies such as Fletcher Building having to 'post-date' the pickup in earnings it had been expecting this year.
"The RBNZ’s base case forecasts will eventually run into the Christchurch reconstruction demand impetus and the need for future OCR increases," Clements of UBS said. "We now expect the RBNZ to stay on hold on until the June 2012 MPS."
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