Bollard to confirm signs of economic recovery, cite problematic, high kiwi

Friday 4th September 2009

Reserve Bank of New Zealand Governor Alan Bollard will probably point to tentative signs of economic recovery in his review of monetary policy next week, while citing the impact of a resilient kiwi dollar.

Bollard will keep the official cash rate at 2.5%, the lowest since the measure was adopted in March 1999, on Sept. 10, according to a Reuters survey. He will increase interest rates by a total of 1.05 percentage points in the next 12 months, according to an index on interest-rate swaps compiled by Zurich-based Credit Suisse Group AG shows

Bollard will “acknowledge the improvement in a wide variety of global and domestic economic indicators, albeit very cautiously,” said Darren Gibbs, chief economist at Deutsche Bank. “We continue to think that the RBNZ will tighten both earlier and more rapidly than it currently expects” amounting to 20 basis points by the end of 2010, he said.

Business confidence continued its rebound in August, while home-building consents climbed in July, stoking optimism the economy is emerging from its worst downturn in 30 years. The recovery may be a slow grind globally. Minutes of the Federal Reserve’s meeting of policy makers last month showed the U.S. central bank saw “considerable uncertainty” in the strength of the revival.

New Zealand’s climb back from recession is still fragile and could be derailed by turmoil in global markets, Bollard told Radio New Zealand this week.

The New Zealand dollar is also acting as a drag on economic growth by sapping the benefits of a revival in commodity prices. The kiwi has surged 37% against the U.S. dollar from its lows in March and recently traded above 67 U.S. cents. On a trade-weighted basis, the currency has climbed 23% since March and was recently at 62.78 on the TWI.

While commodity prices rose for a sixth straight month in August, based on the ANZ Commodity Price Index, the NZD Commodity Price Index fell 0.7% as a stronger kiwi dollar erased the gains in prices of aluminium, pelts, lumber, wool and dairy.

“The impact on exports has yet to be fully felt, in particular the strength in the NZ dollar will make an export-led recovery very difficult,” ASB economists Nick Tuffley and Jane Turner said in a report yesterday. “At some point the RBNZ is going to have to face up to the NZD remaining stronger for much longer than it has assumed.”

Businesswire.co.nz

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