Reserve Bank reviews interest rates

JAMES WEIR

Last updated 13:00 15/09/2011

 

The Reserve Bank is now expected to make its first move to lift interest rates in March next year, and rates will not rise as much as earlier expected because of the recent global financial turmoil.

This morning the Reserve Bank left official interest rates on hold at 2.5 per cent, because of a "real risk the global economic activity slows sharply". 

The Kiwi dollar weakened slightly after the announcement to US81.61 cents, from US82.5 cents.

The local share market rose in morning trade following the review and a global rally spurred by optimism about Europe's debt crisis. 

The NZX 50 Index rose 0.6 per cent shortly after opening, and by midday was up 16.11 points, or 0.5 per cent, at 3280.23.

The central bank warned that if recent global turmoil had only a mild impact on New Zealand, it is likely rates will need to rise.

However, it gave itself plenty of leeway, saying rates would likely rise "over the coming year or so" if the impact of the global turmoil was only mild.

Westpac Bank economists said the worsening global outlook meant the "indicative start date" for an interest rate rise had shifted to March next year, from December.

Rates would still rise sharply next year, about 150 basis points in total, but the peak for the official cash rate had been cut down to 4.3 per cent, rather than 4.9 per cent as previously expected.

TD Securities, which had expected the first rate rise in October, followed by another 25 point move in December, was now "considering" pushing their forecast of the first rise into the first half of next year.

ANZ Bank said the Reserve Bank still needed to lift rates, but "they are in no hurry at present". The end point of any rises in the cash rate would be lower than earlier expected.

"In rugby parlance, the Reserve Bank kicked for touch," ANZ head of market economics Khoon Goh said.

The Reserve Bank's expected track for 90-day interest rates is much lower than expected in June, because of higher bank funding costs and a higher kiwi dollar, it said.

But for now, given the recent "intensification in global and financial risks, it is prudent to hold the cash rate at 2.5 per cent, bank governor Alan Bollard said.

While domestic activity in New Zealand had been better than expected, and "surprisingly robust", the outlook for New Zealand's trading partners had become much worse.

"There is now a real risk that global economic activity slows sharply," he said in today's Monetary Policy Statement.

The New Zealand economy had performed relatively well, while inflation had increased somewhat since the central bank's June statement.

Continued high commodity export prices and eventually rebuilding work in Canterbury would help boost the economy in the future.

Annual economic growth is expected to peak at almost 3.5 per cent by the middle of next year, buoyed by rebuilding in Christchurch.

But since June the global economic and financial risks had increased.

Sovereign debt concerns in Europe and a weaker global outlook had seen world banking markets tighten.

If conditions did not improve, New Zealand bank funding costs would increase, Bollard said.

Because the New Zealand economy had been doing better than many others, the kiwi had risen sharply since June, hurting some exporters and sectors such as tourism. It also dampened import prices.

While headline inflation was above the central bank's 1 per cent to 3 per cent target, much of that was the result in the rise in GST late last year and so would be temporary.

Wage and price setters should focus on underlying inflation of about 2 per cent.

The bank's projections show annual inflation falling from 5.3 per cent in the June year, to 2.6 per cent by the end of calendar 2011 as the impact of the GST rise last year drops out.

The central bank's projections suggest the 90-day bank bill rate will rise from 2.9 per cent in the December quarter to 3.1 per cent in the March quarter next year, gradually rising to 4.3 per cent by early 2013.

- BusinessDay.co.nz

 

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